DairyNZ hopes its new calculator will make contract milker premiums transparent, Anne Lee writes.

Almost a third of the contract milkers included in a DairyNZ analysis made close to no premium over managers’ wages, sparking a call for contract milkers and their farm owners to carefully run their numbers through a new DairyNZ contract milker premium calculator.

DairyNZ systems specialists Paul Bird and Phillipa Hedley have analysed financial data from DairyBase for 80 contract milkers over four consecutive financial years looking at the returns made over and above a farm management wage.

Because contract milkers employ the staff to operate the farm and take on additional risks and responsibilities compared with a farm manager their contract rate is expected to be set to recognise and compensate them for those additional risks and responsibilities.

“But what we’ve found is that 27% of contract milkers would actually be better off financially if they were managing.

“Most of that 27% were in fact worse off – their premium was negative and, in a few cases, substantially negative.

“If we lift the cut-off point to $10,000/ year (premium over wages) then we’re talking about a third of the contract milkers we looked at who were no better off than if they were managing the farm.

“There’s no return to them to cover things like taking on the responsibility of employing labour or production and other risks,” Paul says.

Receiving a fair return for contract milking helps provide stability from year to year so good people remain onfarm and, in the longer term allows them to grow their wealth so they can become the farm owners of the future, he says.

DairyNZ has been working with Federated Farmers in developing the contract milker premium calculator and are promoting it with rural professionals.

Paul says the analysis using the calculator was carried out on budgets from 2018 to 2021 and while the premium has fluctuated from year to year this season it’s likely to come under particular pressure from the rapid rise of onfarm cost inflation.

“This season we’ve seen very big lifts in some costs, especially labour, so it’s important for all contract milkers and farm owners to review their budgets to ensure the premium is there.”

While the median contract milker premium has been $26,000/year the results of the analysis show a wide variation with some contract milkers earning a premium of more than $80,000/year and a small number more than $140,000.

Larger contract milking jobs do tend to have higher contract milker premiums but the data analysis found some large-scale jobs with small premiums and some average size jobs (of about 500 cows) with larger premiums.

“It’s not our job to set a specific premium level – what we want to do with the calculator is shine a light for contract milkers and farm owners on the real return premium the operator of the farm is receiving.

“By making the contract milker premium transparent both the contract milker and farm owner can then make their own judgements on whether it’s at the right level.”

The calculator, while simple to use in terms of inputting data, has complex calculations sitting behind it to account for factors such as the tax benefits of being a business owner. It also allows for the contract milker’s full budget with all associated costs to be inputted.

“The terms of contracts can vary quite significantly – some will include costs others don’t, and farms can have situations specific to them.

“The calculator creates a kind of agenda for a discussion between farm owner and contract milker and possibly a third party, rural professional, so nothing gets missed – benefits or costs.”

Paul says there’s usually two main reasons why a contract milker isn’t receiving a premium over farm management wages.

“One is that the contract rate is set too low to cover the costs the contract milker is expected to cover.

“The other is that the contract milker isn’t achieving the production expected in the contract.

“That could be because the contract milker doesn’t have the farming skills and they would in fact be better off going back to managing and sharpening their pasture management skills for example.”

Paul also advises both contract milkers and farm owners to take a careful look at the numbers going into the budget.

“Look at it line by line and get updated costs for everything.

“We do see costs rising over time so it’s always a good idea to review the budget carefully every year but this year – even over the last few months, we’ve seen costs really take off.”

It’s possible that a contract signed early this year could now leave a contract milker with little to no premium over farm manager wages by the end of the season.

While farm owners may be looking at a high payout, contract milkers’ rates are fixed but contracts can include additional payments during high payout years.

Check list

To help ensure that contract milking rates are set fairly when developing contracts, contract milkers and farmers should:

  • Carefully review the contract expectations and figures and get independent advice if required – this is particularly important for contract milkers who are new to the role or who aren’t strong on financial management.
  • With inflationary costs changing quickly check that the contract is based on current figures and not out of date numbers.
  • Ensure that the contract makes allowances for further cost increases and is set up to ensure that contract milkers aren’t penalised for this – for example many contracts provide an opportunity for contract variations. Some contracts also provide additional rewards to contract milkers in high payout years.
  • Use DairyNZ’s contract milker premium calculator to assess the contract milker return based on current costs.
  • If contract rates have been set too low for the current season – then both parties should discuss the situation as a first step. Involving professional advisors can also be useful. You may be able to identify opportunities to review contract conditions or to agree on how cost increases can be managed.