Comment: Contract milkers must do their homework before signing their contracts, as sometimes the farm owner can end up holding all the cards, writes Federated Farmers Dairy Policy Ann Thompson.

There's been a bit in the news lately about contract milking.

Federated Farmers is currently reviewing the Variable Order Sharemilking Agreement (VOSM), not reviewed since 2011. It sits under the Sharemilking Agreements Act 1937 and was set up to protect those who were working their way up the dairy ladder to farm ownership.

Contract milking has had a chequered history.

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As noted in Geoffrey Taylor's 'A Review of Sharemilking: 1972 - 1996', contract milking agreements decreased from a high in 1984/85 of 525, to only 84 in 1994/95, while VOSM increased 12 fold from 1988/89 to 1994/95.

This was largely attributed to the ambiguous taxation status of contract milking, something which Federated Farmers has been acutely aware of.

Latterly, however, contract milking as a business option has increased at the expense of the VOSM, due largely to milk price volatility. Today there are almost equal numbers of contract milkers and variable order sharemilkers.

Read more from Federated Farmers here.

Federated Farmers produced its contract for contract milking in 2012 (improving it in 2015) in response to what we saw as increased demand in the sector, and some contracts in use we considered would not give enough income protection to contract milkers.

We also set out the difference between an employee and a contractual position, making sure both parties understood the tax implications.

Some people would ask why contract milkers and sharemilkers need any protection given they are stepping up to the plate with confidence.

Our reply is there is an imbalance of power, with the farm owner holding all the cards on costs and sometimes not even aware of these, given they may have been hands-off for a few years.

They might know the number of milksolids produced over the last three years and the number of milking cows in the herd, but do they know the costs of labour, vehicles and electricity used in the shed?

The contractor or variable order sharemilker may be too inexperienced to see past the percentage or the rate offered, not do the sums, and end up in a situation where they
would have been much better on wages as a herd or farm manager.

Federated Farmers Dairy Policy Ann Thompson. Photo / Supplied
Federated Farmers Dairy Policy Ann Thompson. Photo / Supplied

This is an area likely to go to dispute, and having a clear dispute resolution process is imperative.

Luckily the VOSM is protected here as any VOSM Agreement links back to the Order and the Act. The contractor, on the other hand, is linked back to the contract they signed, which may be minimal.

Despite Federated Farmers' contracts having the reputation throughout the dairy sector in New Zealand of being best practice and therefore better for both the farm owner and the contract milker, we are still seeing some contract milkers signing up to, for example, a two page contract, and poorly worded at that.

This is leaving some contract milkers exposed to huge financial risk.

An incomplete contract could see an inexperienced contract milker sign up knowing just the expected production and the contract rate (e.g. 90,000KgMS, at $1/KgMS, with the expected profit therefore being $90,000).

A more complete contract would see more expenses laid out, such as electricity, vehicles, labour, shed expenses, insurance, administration, which could remove around $55,000 off the profit line, leaving just $35,000 left to live on out of the $90,000 expected in the given example.

Having all the information allows a better deal to be made, for both parties.

Bringing the Contract for Contract Milking into the VOSM is the answer and we have been working with the Ministry of Business, Innovation and Employment (MBIE), who administer the Act and the Order.

It is, however, proving sticky, not due to officials' unwillingness to help, but due to wording in the Act. What we are looking at too, is to provide an underpin to minimise the downside to non-herd owning sharemilkers.

While this work is underway, we implore those who are contract milkers to do their homework before signing their contracts and make sure the contract in use is the Federated Farmers' one or at least one with similar detail.