Contract milking during a low milk price

Inevitable fluctuations of milk prices potentially bring stress to contract milking relationships. Paul Bird offers some help.

The dairy sector experiences a lot of milk price fluctuations over the years, but for those new to the sector, this may be the first time experiencing this – and that can be a little difficult and concerning.

On the whole, contract milkers are somewhat shielded from milk price drops, as income is based on milk production, rather than milk price. However, we know farm owners will be considering how to cut costs in response to the milk price, which could effectively reduce milksolids production onfarm.

Pressures are currently increased as high onfarm inflation is further impacting business costs and impacting the milk price.

Everyone is encouraged to remember that milk prices fluctuate, so while it is currently low, it will pass. This is a normal part of the dairy sector, as we are cyclical in nature, which is shown in the milk income graph (figure 1).

Key to making it through is having a medium-term view and working with farm owners to support success for both parties.

Farm owner communication

As with any relationship, communication is the number one key to success. With the current economic conditions, it is even more essential to have good conversations about the impacts of these on your business.

We have seen in previous milk price drops that farmers reduce their farm working expenses, to minimise losses. Our initial DairyNZ forecasting is showing the average farm owner will have a cash deficit this season before paying off any debt.

Consider what this means for you, as cost reduction may put pressure on your contract milker/owner relationship. There are a few things you can be doing:

  • Look to meet at least once-a-month to discuss where you are both at.
  • Share information about your respective business positions.
  • Work together on an approach for the farm.
  • See if they are happy to discuss their updated budget, to give you more understanding of their situation.

This could help provide more understanding on where they may be reducing budget items, such as supplement levels, and see what that may mean for milk production.

Working together will make it easier to get through the tough period ahead. However, remember that if changes to the farm business is going to reduce your income, due to reduced production, then your contract rate may need to be adjusted to compensate.

Contract milking financial history

While you may feel shielded in the current economic climate, it’s still important to understand your businesses’ financials and benchmark them with national averages.

If we look at the last six seasons, gross farm revenue (figure 2) has increased in line with operating expenses. Average operating profit has been about $0.11/kg milksolids, or an operating profit margin of 9%.

Taking a deep dive into the 2022 data, it shows a large range in operating profit. The top 25% of contract milkers were making an operating profit of $0.38/kg milksolids, which enables saving, investing and building wealth over time.

The average bottom 75% had an equity growth rate slower than they may be expecting, while only earning an average farm manager’s wage, with an operating profit of about -$0.03/kg milksolids. Seeing where you fit can help evaluate what changes you should be making, by understanding the gap between your income and expenses. For example, some contract milkers will be building stock numbers, meaning a significant proportion of their income comes from this.

Other contract milkers may have a lower contract rate but also lower than average expenses because they just provide labour and motorbikes. Looking at the whole business is essential, not just the contract rate.

If you are concerned about your business for the season ahead, talk to your farm owner, and trusted advisers, to help analyse your financials and understand how you can optimise your situation.

Looking ahead

I believe dairy farming provides great opportunities and futures for all those who join the sector. A long-term outlook can allow you to build wealth for you and your family.

With a good contract and supportive farm owner, you will be well on your way to long-term success, even if it feels a little hard right now.

As with any journey, there will be bumps along the way, and right now you and your farm owner will be facing different sets of challenges. Keep talking with them, and all those around you throughout the coming season.

  • Paul Bird is DairyNZ lead business adviser.