Dairy Farm Staff And The Shocking Rate Of Employee Turnover

In this video I continue to discuss dairy farm staffing issues. I reference three reports into dairy farm employment.

The first is a report by Dairy NZ called Smarter Not Harder, Improving Labour Productivity in the Primary Sector

The second is a report written by Gillian Searle in 2002 called The Reality of a Career in the Dairy Industry, An Employee’s Perspective


These two reports found that:

• 50% of dairy staff have been in their current job less than 1 year
• The average length of service for a dairy farm employee is less than 1 year
• 1/3 of dairy staff leave the industry every year!

The third report written by Richard Kyte's "A different approach to staffing in the dairy industry" attempts to show that increasing staff numbers actually increased his farms productivity and profitability.

Transcript:


Well, gidday. Glen Herud here again and I am going to carry on talking about dairy farm staff. Last time I said that only a small percentage of New Zealand population are prepared to work on a dairy farm simply because of the long hours involved. 

Today I want to talk about a report that was released by Dairy NZ in 2009 I think, called “Farming Smarter Not Harder.” They had some interesting figures.  

• They said that 50% of staff had been in their current job less than one year.  

• The average length of service, so that's the average time people stay with an employer was less than one year. 

• 1/3 of dairy staff leave the industry every year.

These figures are also backed up by a report written by Gillian Searle way back in 2002, and she found that 59% of staff that she surveyed had been in their current job less than six months. 
These are figures from the dairy industry. These aren't figures from an anti-dairy group. These are their own figures. This shows a horrendous amount of staff turn-over. I can't even imagine trying to run a business where the majority of your staff aren't there for a full year. There is no continuity or anything.  So, these figures surprised me quite a bit. 

Average Staff Turnover in NZ is 20%. NZ Dairy Turnover 40% 

Now, take a look at this graph. This is from the “Working Smarter Not Harder” report.  If you look at the bottom line there that's the New Zealand average around 15 to 20%. This is for staff turn-over.  The blue line at the top is the staff turn-over for the New Zealand dairy industry. As you can see, it fluctuates wildly from down 25% up to 40%, and it's exactly the same every single year.

If look there, September seems to be the time where everything peaks and it's no surprise to me that September is right at the end of calving after people have worked for two months, doing 60-70 hour weeks; they leave.  

750 Cow farm has 4 staff

If we look at what it looks like at a current dairy farm, if you've got 750 cows here in Canterbury. I've said last time that you have about one staff member to 180 cows. So that equals four staff.  Another way of looking at it is one staff member to 75,000 KGs of milk solids. If you have 750 cows doing 75,000 KGs of milk solids that equals four staff. That equals 300,000 KGs divided by 75,000 equal four staff. Essentially that is three employees and one boss. 

So what does that actually look like actually on the farm? 

I am assuming we've got a 60 bale rotary with automatic cup removers and centre pivot irrigation.  Two staff are going to be required to milk and they'll start at 4 am. They go 5,6,7,8,9,10,11,12pm, 1, 2, 3, 4. They'll go through to 5p.m. 

They will have lunch at one and breakfast at eight for an hour.  So that's an 11 hour day. Essentially, one person is always going to be off because they'll have their rostered day off. Depending on what the roster is, it depends what part of the week you have a full complement of staff, but generally speaking you're only going to have two staff plus the boss. Maybe the boss starts at seven and this will probably rotate around. But anyway the third person starts at seven and they'll go right through to five p.m.  So, basically they've got to milk twice a day and they've got to do other jobs.  

750 cows & 4 staff is fine, as long as nothing goes wrong

So having three people on the farm with maybe a relief milker helping out, that sort of works when everything is going well, when the weather is dry, when nothing is broken, where everything just goes according to plan. But as soon as something happens, like what if one of these guys here gets sick? All of a sudden that puts pressure on everyone else. Or if they just don't turn up which is often the case. As we've just seen, the massive staff turn-over rates, you can see that people are leaving all the time within the dairy industry. When someone leaves and you've got this staffing level, it puts pressure on everyone else. Everyone else is already working hard. They are already doing 11 hours a day, and if someone leaves all of a sudden that just puts a heck of a lot more pressure on them.  

Richard Kyte, "A Different Approach To Staffing In The Dairy Industry"

So, I want to talk to you about this report.  Richard Kyte, he was a sharemilker in Southland and now works for the Dairy NZ and he's also a consultant. He wrote this report called, ”A Different Approach to Staffing in the Dairy Industry.” His introduction says, "I believe that the New Zealand dairy industry is being compromised by understaffing on farms especially larger units of 600 cows or more. This has become a significantly greater problem in the last ten years and specifically on the South Island with larger farms." 

He goes on to say, "As the dairy industry grows, to maintain this growth it must attract and retain people within the industry. To do this, the dairy industry must compete with other industries". 

And that's what I was saying last week, dairy is competing with other industries. He goes on and he references Rupert Tipples from Lincoln University and Rupert says that 64% of dairy staff work 50 hours plus.  That's compared to 17% of the general population who work 50 hours plus.  

Richard also talks about Peter Sheehan who is a gen Y specialist. You should Google him. He's got some videos out there. He basically made the comment, "If the dairy industry thought 12 days on, two days off was a good roster it needed to get real. As five days on, two days off was the benchmark." He went on to say, “He's extremely surprised that dairy workers even accepted this.”  Richard goes on to say. “If five days on and two days off is the benchmark then 40 to 45 hour week is also a benchmark the industry should look for.". This comment is interesting. "The drive to reduce hours to date has been mainly from professionals looking in at the industry not from farmers themselves." Ain't that the truth!  

Richard added staff which cost $50,000, but increased turnover by $91,000. $41,000 more profit

So, the gist of what Richard was saying was that he went on and he decided he's going to spend an extra $50,000 dollars. When he was sharemilking on a 600 cow farm, he added an extra labor unit which cost him $50,000 dollars.  As a result of that, he had more time to manage his pasture, so he used the pasture plus system. He had less culls, less lame cows, less mastitis, and as a result of that he brought in an extra $91,000 dollars in extra income and savings. So $95,000 minus $50,000 equals $41,000. So he's still ahead by $41,000 which is about a 80% return. So he spent 50 grand to make an extra 41 grand profit. He spent more money to make more money. 

This is the whole thing, I think the level of staffing we've currently got is a false economy.  I think people think that four staff working on a 750 cow farm is the standard, it’s the benchmark.  But I think that you are losing money in all other aspects of your dairy industry. 

So, the interesting thing about Richard's farm is that he has a staff turn-over rate of two and a half years. So that means that his staff stays with him on average two and a half years and they move on basically because they want to progress in the industry, not because they want to leave dairying.  

So next time I am going to talk about how I would run a 750 cow farm and how I propose to pay for it.

How Much Money Do Dairy Farmers Make-Part 2

How much money do dairy farmers really make?

Are they really that rich?

Do they really pay no tax?

One of my first posts was "how much money do dairy farmers make". It's one of my most popular posts too. The major source for this post is the google search, "how much money do dairy farmers make?".

I thought I'd go into a little more depth.

But first, what constitutes a dairy farmer? 

I'll just concentrate on owner operator farmers in this post as its simple and gives a good indication of dairy farm incomes.

Some quick facts:

76% of all herds are in the North Island

30% of all herds are based in the Waikato alone

The average herd size in the North Island is 325 cows and 596 cows in the South Island.

North Island farms are different to South Island farms, they tend to be smaller and owned by different types of farmers. So I'll look at two types of farmers. The first is your typical irrigated farm based in Canterbury and the second is your typical Waikato farm.

The Canterbury figures have been sourced from Brown Glasford and Co. The Waikato figures have come from Cooper Aitken Accountants based in Matamata (my old home town). The figures are from their 2011 farm survey for "owner operators".

Key points:

SI farms produce 60 kgms more per cow

Canterbury farms are nearly 3 times bigger than the waikato average.

Both regions have a similar income

Farm working expenses are higher in the Waikato. (Please note, this may be due in some part, to the data from different accountants being presented slightly differently)

Interest & Rent are the same amounts based on a per kgms at $1.48/kgms.

Farm surplus in Canterbury appears to be much higher

The total asset amount in Canterbury is a massive $14 Million dollars!

It appears on the surface that the combination of an extra 50 kgms/cow and economies of scale of the new modern Canterbury dairy farms results in greater profitability

The Waikato return seems unsustainably low, to the point where I am doubting the figures.

So back to the original question, how much money do dairy farmers make?

Personal drawings is one part of the answer. The drawings of both regions seem to be very similar at $80,000 to $90,000 per year.

I would think that if some one was running a business in town valued at over $5 million dollars, then they would be worth a package of over $100,000.

I read an article a year ago, where some accounting firm had worked out that an owner operator drawing $40,000/year is equivalent to a person in town earning $90,000/year. This article makes reference to these findings. 

Personal expenditure is about affordability, but Cooke says he often reminds farmers that drawings of $40,000, once everything else is paid, is equivalent to a town wage of around $90,000.

I assume this is because the farmer is able to claim or use the farm assets for personal use. For instance the farmer does not have to have a house mortgage as that expense will be included in the farm mortgage. (I know the personal residence is not tax deductible, but in real terms the house is included with the farm). Another area is vehicle use and fuel, if a car is used to get supplies for the farm then it is tax deductible. Its easy to buy some drench or pick up a few bolts on your way to the movies or dinner.

So there are tax advantages to being a farmer, but the same principles apply to any business owner not just farmers.

So if we assume that a farmer drawing $40,000/year is the same as a townie earning $90,000/year, then we could assume that a farmer drawing $90,000 is equivalent to townie earning over $190,000/year.

If you accept that logic (& you may not) then you could conclude that owner operator farmers are not doing too badly!

The remaining farm surplus of $726,614 for Canterbury farmers and $46,172 for the Waikato farmers will most likely go to the bank in the form of principle to pay down their loans. While this money doesn't end up in the farmers pocket, its still paying down debt.

The return on asset of 5% and just under 1% would suggest that farms make a very poor return. But the cashflow is only part of the profitability equation.

Capital gain is the other major aspect that determines how much money dairy farmers make.

I often hear that farm land has historically appreciated by an average of 10% per year for the last 30 years. This article written by the director of Gareth Morgan Investments says

The value of farmland has risen even faster (10.7 per cent a year) than housing over the past 20 years. That's a very healthy return given there's no tax to pay.
We're talking about a real after-tax return of something in the order of 7 per cent to 8 per cent a year.
A portfolio of world shares over much the same period would have yielded a real post-tax return of between 4 per cent and 5 per cent a year.

This article is a little more in depth and questions the true appreciation rate. But it does include this quote

Nartea and Basanta stated on Table 1 of their paper that the mean rate of
capital gain was 12.90% for dairy farms and 11.84% for farm real estate. The
period was 1966 to 1996.

So if a dairy farmers land is appreciating at a after tax rate of at least 8% (NZ has no capital gains tax) and is making a cash return of 5%, then the farmer is making a return of around 13%, which is quite reasonable. 

If your average Canterbury farm land is valued at $32,000/ha, then 270ha*32,000=$8,640,000 total land value. If this land appreciates by 8% then it gains $691,200 in one year!

Relying on capital gain is a risky proposition, but then again its worked for the past 30 years.


These figures are for owner operator farmers, these are the people who have "made it". They have either reached their goals of farm ownership through years of hard work and hard saving or they were able to inherit or "buy" into the family farm. The owner operator is becoming a rear breed in the South Island as the larger South Island farms are more likely to be in a corporate structure or some kind of syndicate. 

So to conclude, if I was sitting on an asset of over $5,000,000 and I was drawing in real terms, well over $150,000 per year and my business was paying off debt every year and my farm was increasing in value consistently. 

Then I would be pretty happy 

How much money do dairy farmers make?

This article in the press last year caused a few headlines and even prompted me to call talk back.  

Inland Revenue Department figures provided to Labour revenue spokesman Stuart Nash show that, in the latest full year for which figures were available, the average tax paid by dairy farms was $1506 a year. The 17,244 registered as being in the dairy sector, including companies, trusts and individuals, paid only $26m in tax.

It caused me to do a bit of research and look into the subject a bit further.   


Are all businesses listed as being in the "dairy sector" dairy farmers? Can you be in the "dairy sector" and not be a dairy farmer?

The figures also show that more than half – 9014 – reported a loss for the 2009 year and another 2635 reported trading income of between $1 and $20,000.

So, 2635 had a income of between $1 & $20,000. Its probably fair to say that these businesses are not active dairy farmers or they are very small hobby farms.
  
If we subtract the 9014 businesses that lost money and also subtract the 2635 that had an income of less than $20,000. We are left with 5595 business that paid tax of $26m.  $26m divided by 5595= $4,647 of tax paid per business.  Which is still a very low number.


Every year accountants around the country collate their client’s financial data and release a summary document.  It is a great way to compare the different farming types and the changes in financial performance from year to year.

I have been reviewing the client data from my accountants, Malloch Mclean in Invercargill.  They have a large farming client base that gives a good insight into farming in Southland.

I find this table very interesting.  In the 2009 year (that is referenced in the article) shows the average dairy farming client paid $32,754 in tax.  This is quite a different figure from the $1,506 quoted in the press. This figure will include sharemilkers and farm owners. I would expect that sharemilkers will pay more tax than a farm owner would.


Its interesting that the average dairy farm made a cash loss of $7,137 in the 2009 year.  So I bet it sucks when you have made a cash loss and then you still have to pay $32,754 in tax!


My thoughts are that; the IRD numbers are for entities that consider them selves to be in the dairy sector.  This does not mean they are dairy farmers.  Client data from accountants is collated from their clients that they deemed to be dairy farmers, so I am more inclined to believe these figures.


Either way 2009 was not a flash year for dairy farmers.  The years from 2005-07 had an average payout of $4.38, then out of the blue the 2008 year had a record payout of $7.66. Dairy farmers went crazy trying to produce as much milk as possible to benefit from the high payout.  The price for fertilizer went up by about 30% and farmers scrambled to find additional stock feed and grazing.  But the sheep/beef farmers were on the ball and demanded top dollar for grazing and feed.  As a result stock feed/grazing costs increased by 32%.  Then all of a sudden the payout dropped back to $5.20 but the farm working expenses didn't fall.  The result was an average loss of $7,137. 


Other interesting facts from the Malloch McClean 2009 client data:

•  Whopping interest bill of $376,914!
• Tiny Principle payments of $16,943
• Working expenses were 66% of income in 2009 and 43% in 2008
•  2007-2010 the average principle paid was $29,263.  And then in 2011 it jumps to $151,009, so it is obvious that the banks have tightened up on things and are demanding that debt be repaid. So essentially any increase in operating profit achieved now is being passed straight onto the banks. 

And finally, a quick look down the net farm cash surplus line and we see that the average surplus over the five years from 2007-2011 is $330,269.


So I haven’t quite got the violins out for the dairy farmers just yet.