Talking Dairy
Talking Dairy is your go-to podcast for New Zealand dairy farmers. You'll hear from farmers, scientists, and experts who share practical tips and insights to help you succeed. It's all about giving you the tools and knowledge to make the best decisions for your farm. Brought to you by DairyNZ, we help farmers lead the world in sustainable dairying by investing in research, new solutions and advocacy. Follow now and stay informed with the latest episodes.
Talking Dairy
How to build a win-win contract milking agreement that lasts | Ep. 117
Use Left/Right to seek, Home/End to jump to start or end. Hold shift to jump forward or backward.
With the right structure, tools, and communication, contract milking and variable order sharemilking agreements become pathways for equity growth and stronger farm businesses.
This episode brings you practical insights on what makes those agreements successful for both parties.
DairyNZ senior business specialist Paul Bird, and contract milker Hayden Scott, share their experience and insights on aspects such as setting fair rates, managing cashflow in your first season, and having conversations that build trust.
They also explore the expectations and pressures on each side, and how to align them so the business relationship stays strong over time.
Learn more about contract milking
Learn more about setting up a contract milking agreement
Download the DairyNZ Contract Milking Premium Calculator.
A monthly cashflow budget takes your annual cash budget and spreads your income and expenses across the year giving you a month-by-month basis picture.
Enrol in a Dairy Training Contract Milking Course
Have feedback or ideas for future episodes? Email us at talkingdairy@dairynz.co.nz
Stay up to date with advice, latest research, tools and resources. Read, browse, scroll, listen, or be there in person. Visit dairynz.co.nz/get-connected
Why Contract Milking Matters
SPEAKER_00Ki ora and welcome to Talking Dairy. I'm your host Jack McGown from DairyNZ. It's great to have you with us. If you're a contract milker or variable order share milker, thinking about getting into it, or a farm owner working with one, you'll know that when these agreements work well, they can be a powerful pathway forward. Today we're talking about what makes a contract milking or variable order share milking agreement work in practice. Not the theory but the real-world stuff farmers ask about all the time. Things like setting a fair contract rate, being clear on who pays for what, and building a relationship that lasts. We're joined by two people who bring different perspectives to the table. Paul Byrd is a senior business specialist at DairyNZ and works closely with farmers on contract milking structures and budgets, and Hayden Scott, who's currently dairy farming as a contract milker in Tatunaki on a farm owned by the Tatunaki Community Rugby Trust. Together we'll unpack some key questions and share practical insights you can take away to your own situation. Paul Hayden, thanks for joining us. Paul, we'll start with you. Tell us a little bit about yourself, how you came to be in this role at DairyNZ.
SPEAKER_02Yeah, thanks, Jack. Yeah, I've been involved in the dairy industry for a number of years now, and I guess I have a real special interest in helping people progress through the industry because it's one of the unique features of New Zealand dairying. So being involved as a consulting officer, had a bit of time in rural banking and quite heavily involved in the training side of it through the mark and measure course and helping to set up the first uh contract milking 101 course at DURE Training Deliver. So it's a real area of of interest of mine, just uh yeah, helping people and uh helping contract milkers and share milkers and farm owners navigate their way through because it's just a great opportunity and a great pathway.
SPEAKER_00Thank you, Paul. And Hayden, tell us a bit about your background and how long have you been on this farm?
SPEAKER_01Yeah, thanks, Jack. Yeah, I've been farming for about 30 years, held various roles. Started as a farm assistant, worked my way up through management, and then a number of years as a 50-50 shear milker, and then went into an equity partnership where I was the equity manager. And then we sold out of that, and then we've been contract milking for the last 10 years, eight of which have been on the um yeah, South Taranaki farm at Manoya, where we are now.
SPEAKER_00Okay. And what's the purpose of the Tadunaki Community Rugby Trust Farm?
SPEAKER_01It's a charity farm, basically. So we buy all the um proceeds, profits from the farm business go into junior rugby clubs around Taranaki. Cool. So they have this farm and also another farm not far from here.
SPEAKER_00Okay. And do you play rugby yourself?
SPEAKER_01Uh no, getting a bit too old for that.
Paths Into The Role
SPEAKER_00All right. Paul, from the work DairyNZ does with farmers and the data that you see, why does contract milking and variable order shear milking continue to be such an important pathway in dairy?
SPEAKER_02Well, it's quite a unique system that we have here in New Zealand, and international um dairy industries sort of look at what we're doing quite enviously because they don't really have the same sort of pathways. We have about 10,500 dairy herds in New Zealand, and 3,000 of those is some sort of sheeming arrangement on it, and 1,500, there's a contract milking uh structure. So it's quite a high proportion of the industry have these sort of partnerships, and we've got a long history of these, and so you know, it creates a structure where people can progress through and it enables farm owners to be able to sort of step back over time. The other one that's actually starting to become more popular is the sort of leasing system as well. So we just have great opportunities for people coming through. In terms of financial performance, people can progress if they're you know, running their own business, they can start off with quite small amounts of capital and they can really start to accumulate some wealth, you know, relatively quickly and you know, over a five or ten year period really get some momentum and um give themselves sort of the ability to buy into cows or buy land or invest outside farming. So it's a great structure and a great way to um grow your own personal wealth.
SPEAKER_00Thank you, Paul. Now, Hayden, Paul's talked about the opportunities here. What actually attracted you to farming and to running your own business?
SPEAKER_01So I grew up on a farm. So it was what I love to do. So I just wanted to carry that on. And yeah, having gone through, you know, 50-50 shear milking and um equity partnership, that was the just the ability to be in control of our own destiny. So being self-employed is a big thing. And yeah, with contract milking and well, any kind of share milking, I mean, the better you can get the farm performing, you know, you're gonna see the financial benefits of that. So those are the sort of the things that attracted me to it.
SPEAKER_00Okay. And Paul, probably the number one question farmers ask: how do you set a contract rate or a percentage share milking rate that covers costs, rewards the contract milker or share milker for the extra responsibility, but still works for the farm owner?
Setting A Fair Contract Rate
SPEAKER_02I'd get a number of phone calls from people saying, well, what's the going rate? What's the right percentage? It's not actually the right question to ask because people have different structures in terms of different amount of costs going into the agreement. And so it's really essential. There's no quick way around it. So you've really got to work this out thoroughly in terms of what reward over and above managing the farm do you, as the potential contract milker or variable or share milker and the farm owner, what's the potential premium over and above management that you think's fair for that particular job on that particular farm? That's really the way to work it out is you say, right, if I was managing this farm, what would I be getting paid? What would be my sort of after-tax cash surplus? And then we've developed a contract milk a premium calculator that you can then plug in what the proposal is that's being offered, all the detail that's required around that. And when you get to that bottom line, you can say, well, this particular job, based on all the um the variables, this is what we estimate, the premium that I'm gonna make compared to managing. And that's really the fairest way to do it. It takes quite a bit of time. We've got a calculator, a number of advisors and consultants have similar types of calculators, but the main message is don't rush into it and do it thoroughly, and so you're really confident that the amount of effort and work and pressure you're gonna be under, you are rewarded for that.
SPEAKER_00Yeah, because you're making an investment and there are there are other places that you could invest. So you want to get a return that is better than alternative investments and recognizes the kind of extra effort as well, right?
SPEAKER_02Yeah, no, that's right. You've got you're employing staff, you're responsible for staff, you've got to do your own uh accounts and GST, and it's a different level of pressure compared to most farm management jobs. So there has to be a reward.
SPEAKER_00Okay. Hayden, I understand you are moving to a large-scale 1,100 cow contract milking job in Huanganui. You must be excited about that. What was the main reason for the move? And can you tell us about the process that you went through to ensure it was a fair contract?
SPEAKER_01Yeah, once we got offered the contract for the new job and then sort of work it out what it was offering. It needed to be better, in my opinion. But in all honesty, I had no idea how much better. You know, it needed to be better than what we're currently on because it's obviously twice the size. Basically involved a simple conversation with a farm consultant that we've used here for the last seven years. Um, and he's been fantastic. And yeah, all it took was to relay the information to him. And he quite simply put it to me that you need to be looking at X amount as a minimum with the potential to earn X amount as a maximum. And that made it very clear as to what we thought, you know, should be a um a fair contract rate for us.
SPEAKER_00Okay. And then obviously the farm owner came to the party on that.
SPEAKER_01Uh, yes, yes. We kind of met in the middle. We got nearer on what we were sort of asking for, and they had to come up a little bit to meet that.
SPEAKER_00Okay, cool. Now, Paul, what skills do contract milkers and variable order share milkers need to succeed beyond good animal and pasture management? I'm presuming that financial management's one of them.
SPEAKER_02Financial is definitely one of them. I would also say that it's all of us, isn't it? Like you don't just do some training and have the skills and then it's finished. You know, the whole of life is just trying to build your skill set all the way through your life. And so I suppose I'd probably start it off and say the most important thing is that people need that sort of drive and motivation to have their own autonomy and sort of run their own business because there is the forneta rewards there, but then there's also extra pressure there. Some people don't necessarily want to go into business, but somehow they get sucked along because that's the system. And for some people, it's the wrong thing to do. So be really confident that you you've got that drive, and then yes, go for it. You're not going to have 100% of the skills on day one, but you've just got to have in your mind that it's just a continuous learning. You have really good people around you, mental farmers, great consultants. You know, Hayden being working with uh Brendan Atrill down in Tatanaki. So, you know, really good people to motivate you and help you through. That would be the first thing. And then it's really about reputation. Right from when you first start working on a farm, reputation is really how you get jobs. And reputation is about primarily about reliability and trustworthiness. And then, yes, you've got to be good at what you do. You're never going to be perfect at everything. So focus in on just constantly getting better. And then, you know, your initial comment about the financial, which is sort of an an area of mine, is you do need to be thinking about if you might be in a partnership, at least one of you's got to be really good financially. So you've got to speak the sort of financial language and know how to do cash flows and understand about debt and managing money. It's really got to be important. So start working on that quite early on.
SPEAKER_00And now, Hayden, when you're looking back, how did you get the confidence to take these steps into running your own business?
SPEAKER_01I guess it naturally came about just going up the ladder, you know, through management and then 50-50 share milking. But yeah, having a good support network behind you, you know, farm consultants, accountants as well, just those people that you can rely on to back you up and uh give you the uh the information if you require it.
SPEAKER_00Did you have any missteps along the way?
SPEAKER_01Yes, certainly did. But those are things you learn from and you've got to grow from, or else you're just gonna dwell on them and not go anywhere, I suppose. So everyone makes mistakes, so yeah, you just gotta move on and learn from it and try not to do them again.
SPEAKER_00Okay, Paul, for a contract to work, both parties need to win. So, how should farmers think about viability so that the contract milker or chair milker can build equity while the owner also stays profitable?
SPEAKER_02The first thing I think from the farm owner's point of view, it's important really for them to probably try and step back when they first started out and think about it from their perspective. And to me, the the most successful partnerships are where people sort of put themselves in the other person's shoes or sort of remember back, you know, when they were starting. I think that's the really key thing. You know, are you genuinely interested in that? Often younger people coming through, variable order, contract milker, what are their goals? Are you asking them questions about how they're going to sort of um get ahead and achieve their goals? The contract milker needs to also think about the farm because you're on a farm, you're running this large business, could be$10 million plus business. That that farming family's probably spent decades building up. So, you know, you've got a responsibility to perform well. You know, you're running this big asset, so you've really got to take that responsibility on. From a financial point of view, there's no point in going into these partnerships unless both parties have worked out is it going to be viable for them and are they going to be getting ahead? But, you know, both the farm owner, because they're going to be giving up some extra profit that they perhaps had before, they're going to be giving up some of that profit to share with the contract milker. So you've got to do those budgets in quite a lot of detail to be confident. And I guess a couple of rules of farm that I would look at, because I see a lot of dairy-based reports from contract milkers, and I see the ones that sometimes they can be on quite big farms. I see the ones where they might be moving ahead by five, 10,000,$15,000 a year. They're just not really progressing. And when I see the people that are taking those steps forward of sort of$40,000,$50,000 a year of sort of equity growth and wealth creation, you can tell that for whatever reason, they're on a farm where the agreement's working and they're taking those steps that they're getting rewarded for the risk they're taking. They're going to accumulate$500,000 or a million dollars over sort of a 10-year period. And that's really the pathway you really want to get on to reward you for taking that risk to run your own business.
SPEAKER_00Now you've talked a little bit about aligned philosophies and goals. There can be a tension between the goals or drivers for contract milkers who, you know, often the contract's based on production, and farm owners where profit isn't necessarily tied directly to production. What are some good tactics to make sure that the contract milker and the farm owner are on the same page about inputs, risks, long-term goals?
Making The Numbers Work For Both
SPEAKER_02This is going to sound a little bit simple, but a lot of it's just about time. And you've just got to spend enough time together and listening, which would be the first thing, and listening and talking about the philosophies and what you think about things. And so I think this thing is rushed. So, you know, there's going to be an interview process, and then there'll be going through the agreement in quite a lot of detail. And those two things should be quite a few hours of time. I think you've just got to go in there asking lots and lots of questions, spend time in the ute, driving around the farm, just listening. That gut feel is important. So, you know, rely on your gut feel. If you think you're going to be able to work with this person, if you spend enough time talking around in the ute and around the kitchen table, going through the agreement, clause by clause, you literally gonna be discussing all the different variables and uh things like that, and you'll pick up whether you're uncomfortable about certain things. So I think it's just time. Don't rush it and talk to people as well. Get references, talk to people in the area, just be really comfortable that you're going into partnership with someone who's again reliable, trustworthy, and has similar values and philosophies.
SPEAKER_00Okay, thanks, Paul. Now, Hayden, you've talked about being where you are for was it eight years you said?
SPEAKER_01Yes, eight years. Yeah.
SPEAKER_00So, you know, your first season as a contract milker is a distant memory, but you're about to do another one on another farm as a you know, a first season on a bigger farm. I'm curious how the payment structures affect your cash flow through this season, you know, in the first year and subsequent years. And what have you learned about making it work?
SPEAKER_01When we first started contract milking, we had it the standard payment through the dairy company. And that was a struggle because you know you're not getting your first paycheck until sort of three months into it. But of course, you still got your expenses, you've got staff expenses and whatever else comes with it. That certainly was tough, and it probably takes you that first six to twelve months just to get yourself established. But when we came here, we actually run a um payment system that's spread over the 12 months. So we get 90% of our contract rate based on the average farm production, and that's spread over the 12 months in a even spread. And then month 13, we just get the top-up payment of the other 10%. And if we've produced over and above what the farm average is, then yeah, that on top of it. That certainly is a lot more attractive from my point of view, especially if you were starting out, because you can start off and you've got an income coming in from the first month. That made a big difference when we shifted to where we are now, yeah.
SPEAKER_00Cool. Okay, that's interesting. Now, Paul, this payments like the cooperative difference, which are another hot topic. How should contract milkers and farm owners think about establishing these rates in the contract or dealing with them?
SPEAKER_02Yeah, there's quite a bit of uh discussion and debate and difference of opinion on things like the cooperative difference and then sort of bonuses and premiums and all these sorts of things. So it's probably a little bit tricky to go through each one and say, oh, you, you know, you should do this and you should get all of the cooperative difference because you're, you know, you're sort of running the farm. Probably my main comment would be fundamentally from a financial point of view, the contract's got to be set up that there's, as I was saying, there's got to be that good reward for the contract milk. And you don't want to be using things like the cooperative difference as sort of like a, it looks like it's lopped in as a part of the contract, but it's sort of aspirational. And you're thinking you're gonna get all the cooperative difference if you tick all the boxes, but for whatever reason, it's quite hard to tick every box, and then you don't get some of the income. But your your understanding was that you were gonna get most of it if you performed well and it just didn't quite happen. So you're sort of getting less than what was sort of discussed and what was expected. It's a little bit like the milk production, you know, when you you establish sort of a an expected milk production, if it's an aspirational milk production, and then that gets used in the financial sort of calculations, and you work it all out and you think, right, I'm gonna make X thousand above managing, but for whatever reason you didn't really look at it closely enough, and it's just an aspirational figure, and you never quite get it. There's this discontent's just gonna start building up. So I probably think you're better off have these different sort of bonuses, that's great, but make sure the contract's designed that you know, good solid performance, you're gonna make the money that you want to make, that's really 90% of the story.
SPEAKER_00Okay, so what I'm hearing is that your contract should primarily be what is viable. You have to do your due diligence on that, make sure it's viable. I guess also that it's within your control as much as possible.
SPEAKER_02I think that's a good summary, yeah. You've that's right. You've got to be able to manage it to get these things because as soon as you start f having this sort of discontent building up, you just don't want to have that. You want to keep those communication lines open and not have undercurrents starting to build up because that's where the where the problems occur.
Aligning Goals And Managing Risk
SPEAKER_00Yeah. Okay, so beyond the numbers for both of you, what do you find makes the relationship work on farms? So, Paul, what you've heard farmers talk about, and Hayden, your own experience.
SPEAKER_02I think the most important thing is that you go into a relationship and you've just got to have that win-win approach. And so you're interested in other persons and other families' goals and objectives, and you're trying to see things from their perspective. And if both people are doing that, that's where I see the most uh fantastic partnerships. And sometimes these partnerships go on for long periods of time, and sometimes contract milk will go off and buy a farm with the farm owner because they just work so well together. So to me, you've got all the financial stuff, yes, that's important, but you've got to have people that are wanting the other person to succeed. That would be overwhelmingly the most important thing that I would see.
SPEAKER_00And from your experience, Hayden?
SPEAKER_01Oh, yeah, certainly working with owners and you know, farm consultants that you can relate to. That work in a relationship is a big thing, other than your own family. They're probably going to be the second most um partnership that you're involved with. So having someone that you can fully trust in that regard is a big thing. And also, you know, the ability the for the owners to basically leave you alone to run it and you know, not try and micromanage what you're doing. I think that's a big thing too. Just having the trust that, yeah, you know what you're doing.
SPEAKER_00Okay. Thank you. Paul, what sort of advice and tools are out there for anyone going contract milking or share milking or thinking of putting a contract milker in place on their farm before they sign anything? What's there to help them?
SPEAKER_02Well, that's the great thing about our system. We've got the advice and the tools and the sort of specialist uh consultants out there. So there's actually a lot out there. And so you've really got to get have that mindset of making sure you've got the right team around you. I would be strongly recommending any contract milker or or share milker going into an agreement, they really need to get their own independent advice. You know, most will have their own accountant, but I'd also encourage people to get a specialist farm consultant who does a lot of work in this area that's working for them that they've contracted in to give them advice on making sure they get the contract right, helping them in some of those discussions and negotiations, because it's you know, going into these things, particularly for the first time, it's not your day job. You know how to run a farm, but trying to negotiate a contract, it's quite a new thing. So get people around you to help you. Um, in terms of sort of more formal training, relatively new course, the contract. That Dairy Training Limited Deliver, I'd strongly recommend that in terms of working through the contracts and understanding them. It's an excellent course. And they also, dairy training, do the business by the numbers, so just basic budgeting costs, just really essential. We've got a contract milk or premium calculator online. So utilize that or get your advisor to utilize that. There's lots out there, and you've just got to ask people to help.
Payment Structures And Cash Flow
SPEAKER_00All right, well, that's it for this episode of Talking Dairy. A big thank you to Paul and Hayden for your time and sharing your experiences today and the best of luck, Hayden, for the season ahead as you embark on that new job. There's a clear theme that came through. Successful contract milking agreements and share milking agreements aren't about finding the perfect number or the perfect season. They're built on really clear roles and solid budgeting and open communication with a genuine win-win mindset. When both parties understand the risks, they share information early and they use the tools available, and there are plenty of them. Contract milking and share milking can be a strong and sustainable pathway, whether you're building equity as a contract milker or strengthening your farm business as an owner. Paul Hayden, thanks for sharing your experience and practical insights today. Now, if you want to dive deeper, you'll find contract milking tools, budgeting support, and training on the DairyNZ website, and we'll link to those in the show notes. Thanks for listening and we'll catch you next time. Matewa. If you'd like to get connected with DariNZ's latest advice, research, tools, and resources, whether it's reading, scrolling, listening, or in person, you can visit dairynz.co.nz forward slash get-connected, and don't forget to hit follow to keep up to date with our latest episodes. As always, if you have any feedback on this podcast or have some ideas for future topics or guests, please email us at talkingdairy at dairynz.co.nz. Thanks for listening and we'll catch you next time on Talking Dairy.