Share dairy farming – Model Code of Practice

There is no such thing as a “standard” share dairy farming agreement and there are many elements you need to include. The Australian dairy industry has developed a Model Code of Practice with guidelines and four tools for assessing and establishing share farming arrangements. The code aims to:

• promote share farming as an effective way to operate a dairy farm business and a viable progression path in the dairy industry
• inform all people involved in share farming about their responsibilities
• set an industry standard by describing acceptable share farming practices

It is recommended that both parties work through the code with a dairy adviser to develop their agreement.

Before going any further, watch a quick video of farmers describing their share farming experiences.

Each tool can be downloaded:

Tool 1: check if the arrangement is fair and affordable for all parties using the Calculator

Tool 2: assess the arrangement from
a legal perspective with the Legal Test Guide

Tool 3: use the discussion Checklist to explore the key factors in the arrangement

Tool 4: then prepare a draft with the share dairy farming agreement

A successful share farming arrangement can turn combined resources into a profitable dairy business. Success depends not only on the right assets but also on recognising and respecting the skills each party brings. Because share farming changes the balance of control compared with an owner-operated farm, it is essential that both parties clearly agree on who controls which areas of the business.

Why consider a share farming arrangement?

Valid reasons why a farm owner might enter a share farming arrangement include:

• to invest in land assets that are utilised profitably and increase in capital value, while needing the management skills, stock and plant provided by another party;
• he/she owns all the assets required but wants less involvement in the day-to-day operation and management of a dairy business, while wanting continued involvement in management direction;
• a step towards farm succession

It is not good business practice for an owner to engage a share farmer to avoid employment compliance issues (such as superannuation, taxation or workers compensation obligations) or to extract long hours, including overtime, from someone who is essentially an employee but is called a share farmer. Some reasons for someone wanting to become a share farmer are:

• an improved ability to grow net worth through increased operating profit and asset creation;
• greater job satisfaction through additional responsibility and direct gain from the outcomes of business decisions;
• an opportunity for significant involvement in a dairy business for someone with the skills but limited access to the capital required to own a dairy business;
• a gradual path in terms of skills acquisition

Becoming a share farmer should not be motivated by reasons such as splitting tax, getting a free house, or simply avoiding a boss.

Share farming has traditionally been a pathway to farm ownership, offering share farmers the chance to build assets. It can also benefit landowners who need strong management skills supplied by a share farmer.

However, share farming involves risk. For owners, the risk lies in whether the share farmer has the management skills to deliver. For share farmers, risks include seasons, input and output prices, and meeting agreed performance targets.

Both parties must understand these risks. Risk exposure depends on the share of the business-the greater the capital invested, the greater the exposure to milk price, production, and seasonal variation.

Ingredients of a successful arrangement

Many long-term share farming arrangements are highly successful, benefiting both parties by combining skills and resources. Success depends on specific factors, including:

• Financial returns: realistic returns for each party, assessed with actual data before starting and reviewed during the agreement.
• Farming philosophy: compatible views on how to run the farm, reinforced through shared budgeting for income and costs.
• Personal fit: communication, empathy, and mutual respect between the parties.
• Clear arrangements: transparent income and cost sharing, reviewed regularly (ideally monthly).
• Defined control: clear discussion of decision-making roles and responsibilities.
• Agreed communication: established methods for meetings and day-to-day interactions.
• Written agreement: not a substitute for the above, but a tool to highlight issues, avoid conflict, and test compatibility before the arrangement begins.

Next step: our discussion checklist is a great starting point. You can use it to work through the elements that should be considered in an existing or new share farming arrangement.

Setting up an arrangement

Share farming arrangements are often based on the percentage of income received and the costs paid by each party (e.g. 50/50 share) and, importantly, the operating profit (bottom line) and the related return on assets to each party.

Next steps: Our model code of practice includes a fairness and affordability calculator. Use this to assess an arrangement that is currently under review or being proposed.

Finance

When entering a share farming agreement, both parties’ financial positions matter. However, debt levels and debt servicing do not determine what is a fair share arrangement.

Owners must ensure their finances are strong enough to support engaging a share farmer. Share farmers providing assets must consider whether they can manage debt repayments and the initial cash flow delays at the start of the agreement.

Financial management in these early stages is a critical skill, which a share farmer must acquire if growth in net assets is to be achieved.

Developing a written agreement

Developing a share farming agreement is a multi-step process. It usually begins with both parties meeting an adviser to clarify their goals. For example, an owner may want the share farmer to handle daily management while both share seasonal decision-making. This helps define how much control the owner will hand over and forms the basis for cost and income sharing.

The agreement should also set production and budget targets, based on milk and input price forecasts and historical data. These targets should be reviewed during and after the first year to assess business performance and whether each party’s expected returns were achieved.

As a dairy business changes, the share arrangements need to be reviewed to ensure the share is still equitable to both parties:

• an agreement is then drafted and reviewed by the 3 parties (owner, share farmer & adviser) and changes are made accordingly;
• then an accountant may be consulted by either party in order to get the “financials” right for each party;
• then the agreement may be ratified by a solicitor, or it may remain a memorandum of understanding between both parties.

The aim is for the agreement to have fairness, relevance and then be checked off both legally and financially. The more detailed the discussions between the two parties and the incorporation of the discussions into a written document, the greater the chance of success. In addition, if the arrangement is not successful, a written document will assist with the termination and exit procedure.

It is important to appreciate that two parties jointly signing a milk supply arrangement does not constitute a share farming agreement – it is simply the income share arrangement.

The share farming agreement should be in two parts – standard clauses and non-standard clauses that will vary, depending on what the parties have agreed.

Next steps: Our model code of practice includes a share dairy farming agreement which you can tailor to your situation.

Renewal and renegotiation of an agreement

When renegotiating a share farming agreement, both parties should review how the previous agreement worked in practice.

Two key issues determine success:

1. The share farmer’s ability to improve dairy profitability.
2. The share farmer’s role in maintaining the land’s amenity and asset value.

Because asset care and profit can sometimes conflict, owners and share farmers should regularly discuss these priorities—and always on renewal of the agreement—to reach a workable balance.

Next steps: Use this checklist to guide negotiations between the parties renewing an existing share farming agreement. It is suggested that the landowner and the share farmer complete the checklist independently and then exchange copies. Allow a week to think about it and then meet to discuss the issues and options.

Unfair and sham contracts

The Federal Independent Contractors Act 2006, which took effect on 1 March 2007, introduced federal unfair contract laws. These laws allow work contracts to be challenged if their terms are unfair.

The Act defines independent contractor using the common law control test. It gives the Federal Magistrates Court power to review, vary, or set aside unfair contracts.

The laws apply where at least one party to the contract is a company, and the contract is for work performance other than domestic or private work.

Engaging a share farmer – legal obligations

There are a number of legal obligations you need to be aware of. These include residential tenancy laws, the NSW Agricultural Tenancies Act, superannuation and workers compensation.

Illegal workers

Farmers engaging contractors must comply with illegal worker laws and check work rights. Liability can still arise under an independent contracting arrangement. If a contractor does not satisfy the common law control test, workers they bring onto the farm may legally be regarded as the farmer’s employees. If those workers are illegal, the farmer could face criminal charges for employing them. For more information visit our employees page.