Share dairy farming

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

Watch: share farming video

A successful share farming arrangement can realise the potential of individual resources, resulting in a profitable dairy business for each party. However, it is not just joint provision of the right assets that leads to success. It is important that share farming participants recognise and respect the skills, as well as the assets, brought by the ‘people’ entering the share arrangements.

Share farming arrangements invariably involve a shift in ‘control’ within the business compared with an owner-operated dairy farm. If a share farming agreement is to be successful it is important that the parties entering into the agreement identify and agree on the areas that each will control.

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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

It is not a good reason to become a share farmer ‘to split tax’, ‘to get a free house’ or to avoid having the boss looking over your shoulder.

Traditionally, there has been a pathway from share farming to farm ownership. A well-planned share farming arrangement can provide substantial potential for asset growth by share farmers. Some purchasers of dairy land may require the provision of a high level of management expertise that can be supplied by a share farmer.

Parties considering a share farming agreement for the first time need to be aware that it involves risk. For a farm owner, the risk is generally in the area of management. Will the share farmer have the management skills expected to fulfil his/her part of the arrangement? For a newly engaged share farmer, the risk is related to seasons, prices of inputs and outputs, and his/her ability to provide the necessary skills to reach stated targets.

Both farm owners and share farmers need to understand the risks of operating within a share farming agreement and understand the risk exposure. The level of risk varies for each party as the level of share increases.The greater the capital invested, the greater the risk exposure to milk price, production and seasonal variation.

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Ingredients of a successful arrangement

There are many very successful, long-term share farming arrangements that suit both parties and value-add to each party’s skills and resources. The success of the arrangement involves specialist skills, which some people have naturally and others need to learn. These include:

• the potential for providing reasonable financial returns for each party, which is reviewed prior to commencement using actual data and reviewed during the agreement period;
• compatible philosophies on ‘how to dairy farm’ – this can be established in early discussions and reinforced when establishing an annual budget that forms the basis of the income and cost sharing;
• both parties’ personalities are suited to a share arrangement – communication, empathy and mutual respect are integral components of success;
• extremely clear income and cost sharing arrangements that are frequently discussed, preferably at regular monthly meetings;
• the issue of ‘control’ is specifically discussed and individual roles are clarified and acknowledged by both parties in advance of any decision making;
• both parties agree to methods of communication – for example when and how regular meetings will occur, and how owners and share farmers will interact between times (just drop-in or phone prior to catching up);
• a written agreement – which will not overcome shortcomings in any of the above, but is likely to expose them and, where possible, help avoid conflict during and at the end of the agreement, or even identify incompatibility before an agreement commences.

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

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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.

Discussing and developing a share farming arrangement is best done with the help of a consultant or a dairy adviser. Once an agreement has been reached, then check the financial and legal aspects with an accountant and solicitor.

In the formulation of any agreement, some basic principles should be followed – download our share farming basic principles fact sheet

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.

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Finance

The individual financial positions of both parties are important when considering entering a share farming agreement. However, the debt level and the annual debt servicing by either party have no relevance on the formulation of a fair share arrangement.

Owners must ensure that their financial position is adequate to allow them to engage a share farmer. A share farmer who is required to provide assets must decide if he/she can afford the debt servicing and the lag in cash flow at commencement.

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.

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Developing a written agreement

This is a multi-step process which usually starts with both parties sitting with an adviser to work through what they are actually trying to achieve or to find in an arrangement. For example, this may be to find someone to take the day-to-day management issues off the owner and yet leave the season-by-season decisions to be made by both parties. This starts the process of determining the level of control that the owner wants to hand over to the share farmer, and starts to form the basis of the share farm agreement and cost/income sharing.

An important part of developing the share farming agreement is to establish some production and budget targets based on anticipated milk and input prices and historical data. This can then be reviewed during and at the end of the first year in an open discussion regarding the overall business performance and whether the returns anticipated by each party 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.

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Renewal and renegotiation of an agreement

When share farming agreements need to be renegotiated, it is useful for both parties to examine all aspects of the past agreement closely and consider how the agreement has operated.

There are 2 key issues regarding a successful share farming agreement. These are the degree to which the share farmer is able to improve the profitability of the dairy operation and the degree to which the share farmer is able to fulfill a stewardship role in maintaining the amenity and asset value of the land resource. If both issues are attended to as a normal part of farming operations, the business arrangement between both parties has a solid foundation.

However, the maintenance of the amenity and asset value of a land resource is often at odds with the maintenance of profit.

Clearly, profit provides a motivation and incentive for share farmers to perform. The farm owner however, usually focuses on both assets and profit. This difference in focus ought to be discussed regularly between the parties, and certainly upon renewal of the agreement, to strike an acceptable compromise.

strong>Next steps: use this checklist to guide negotiations between the parties renewing an existing share farming agreement. It is suggested that the land owner 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.

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Unfair and sham contracts

The Federal Independent Contractors Act 2006 commenced on 1 March 2007. The main impact of this legislation for farmers is the creation of federal unfair contracts laws which set up a new system for challenging the terms of work contracts. The Act uses a definition of ‘independent contractor’ which is the same as the common law ‘control test’.

The Independent Contractors Act, establishes a process in the federal Magistrates Court to review, vary and/or set aside contracts which are found to be unfair. These laws apply if at least one of the parties to the contract trades as a company and the contract is for performance of work, other than domestic or private work.

Next steps: read more about the Act and the control test. Download our share farming – unfair and sham contracts handout

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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.

Next steps: download our share farmer – legal obligations explained fact sheet

Farmers intending to enter into a share farming arrangement should check with their state or territory workers compensation authority before work begins. Read a summary of how the laws apply to farmers employing contractors for farm work in your state: ACT NSW QLD TAS SA VIC WA

Note: these laws may change. Before entering into any contracts, check for changes to legislation though your state or territory workers compensation authority.

Illegal workers

Farmers engaging contractors to work on the farm should be aware of the illegal workers laws and how to check work rights

Farmers can be liable in cases where there is an independent contracting arrangement. In addition, if a contractor does not meet the common law ‘control test’, any workers brought to their property to work with the ‘contractor’ could be taken to be the farmer’s employees. If these employees are illegal workers the farmer could face criminal charges for employing them.

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