WHAT ARE THE ISSUES SURROUNDING 50/50 SHAREMILKING?
by Donald E Fraser
Historically 50/50 sharemilking was a rapid way to own your own farm. In the early 70’s, when I was with the Rural Bank and State Advances, people were coming from overseas, predominantly from Holland and Great Britain, going 50/50 sharemilking and rapidly moving up to farm ownership.
This situation has changed drastically. It is quite difficult to get through the ranks to get to ownership by 50/50 sharemilking these days. Some of the issues surrounding this are as follows:
- The value of cows in proportion to that of a farm has diminished. That is to say, the value of the cows is a much smaller proportion to the cost of the business.
- IRD now tax the increase in value of livestock.
- Small 50/50 sharemilking jobs are no longer economic.
- Owners now want all the income for themselves so they can service debt, and run their own businesses. That is to say the number of sharemilking opportunities is declining, as is the number of farms.
- Lenders are not that keen on 50/50 sharemilkers, particularly the smaller ones.
- A number of unscrupulous sharemilkers have given the industry a really bad name. The unfortunate thing about dairy cows, is that they have legs and can walk. Nothing makes a financier grumpier than to find that his security ie. the livestock has vanished.
- 50/50 sharemilkers rely on an agreement and a good relationship with the farm owner. This relationship can go sour, and then a 50/50 sharemilker may find the owner has more power than he, and this can be soul destroying, with people leaving the industry as a result.
The financial considerations from a lenders point of view are as follows:
- Do you, the client, have the ability and experience to run the business, ie. milk, feed, maintain the cows, plus manage the financial aspects of the business very carefully?
- Do you have sufficient equity to meet lending criteria? Lenders are reluctant to lend more than 50-55%, although sometimes up to 60% of the value of the livestock.
- Is the loan big enough to warrant the bank’s effort? Banks are not keen on small loans, with high input by them, which would cost them money.
And Most Importantly,
- Are you, as a 50/50 sharemilker likely to become a landowner, giving the bank more business later?
LENDING SCENARIO
The following is an example of a 500 cow position from a lending perspective:
ASSUMPTIONS: 500 cows, 150,000 kg/ms, modest input
COSTS
500 Cows @ $900 eachl $450,000
70 R1s @ $400 each dld28,000
4 Bulls @ $500 eachdddd2,000
______
Total Stock Purchases l$480,000
Tractor etc dl100,000
Working capital lllllll75,000
Legal fees lllllllll5,000
Shift costs lllllllll5,000
Unforseen llllll10,000
______
Total costs of the new business l$675,000
SECURITY MARGIN
Stock llll480,000
Tractor llll100,000
_______
Total Securityl $580,000
Maximum lending rate is 60% therefore:
Maximum amount of loanllll 348,000
_______
Total cash required l$327,000
Please note the following key points:
- The bank will use their own valuation of the stock, not the purchase price necessarily.
- Working capital is an essential part of any farming business, and must be allowed as part of the costs.
- Some banks will not lend on tractors and plant.
- Some banks will only go to 50 – 55% of the value of the cows.
DEBT SERVICING SCENARIO FOR ABOVE CASE
INCOME
500 cows x 300 kg/ms per cow = 150,000 kg/ms
150,000 kg/ms x $3.80/kg x 50% llll285,000
Boners and Bobbies lllllll15,000
______
Gross Income l$300,000
DEBT COST
$348,000 @ 8.5% interest lllllll29,580
Principal repayments say lllllll60,000
______
Total Annual Debt Cost lll$89,580
Debt Servicing Ratio is lllll29.86%
WHAT DOES THIS MEAN?
It means that for every dollar that comes in the gate, 29.86 cents goes out in debt costs. It is an important calculation to the bank and is heavily relied upon. There cannot be a whole lot of hire purchase payments on top of this debt servicing scenario.
If you are a sharemilker, and buy a new tractor on hire purchase, the moment you load the automatic payment, your banker will know that you have purchased the tractor, or any other piece of machinery for that matter. Go to him in the first instance and discuss the logistics with him. He may help you go from an emotional decision to a logical one.
OTHER ISSUES
The lenders will look at how drought-proof your farm is. Do you have sufficient supplementary feed? Is there irrigation available? What is the local rainfall? Etc.
What is the ability of the sharemilker to maintain his stock in good condition? This is very important, as the livestock is the bank’s only security.
What opportunity is there is increase stock numbers? Thereby increasing the sharemilkers asset, which in turn provides additional security for the bank?
How well will the sharemilker be able to manage and maintain the business?
SUMMARY
- 50/50 sharemilking is a tough business.
- Some banks do not want this type of business, and avoid lending on them.
- 50/50 sharemilkers need to be well organised, and have excellent focus on the business. They generally need to be well above average farmers.
- Sharemilkers need to have very good presentation with them, when they go to the bank for a loan. They need to have all the issues covered, including background, property details, budgets etc.
If the bank declines your application, take heed of this advice as it probably wouldn’t work any where else either.
The economics of smaller 50/50 sharemilker jobs are just not there, and should be avoided.
In 50/50 sharemilking, there are a lot of pitfalls and problems, and people going in with rose-tinted glasses need to be reminded of just how difficult it can be.
Following a recent visit to a large scale equity partnership in the South Island, I had the opportunity to talk to the man who runs it, an outstanding dairy entrepreneur.
It was interesting talking to him about mental toughness. He talked about calving being like running a marathon, you need to have done all the preparation both physically and mentally. You need to be alert at the start, and then pace yourself throughout the process. Pacing yourself means staying focused, realising that there will be pain, and looking out to the end of the season when it all finished. Also, he is a big guy, and expects to loose 6-7 kg’s of weight during the season. Breakfast and Lunch are often combined at 1:00 pm.
One of the key points to note here is that we can do all sorts of things when we are young, but further down the track, the mind may be willing but the energy is not quite there.
He also talked about mental toughness necessary for when things start going wrong, that is not if things go wrong, but when. It is how you handle those processes when things do fly to bits that make the difference. Panicking, raising your voice and blood pressure, do not solve a thing. Yelling at tired staff is not a solution either.
If you know there will be problems, and there will be, then take a big breath when it happens, pause, and then start to unravel the problem to solve the issues at hand. Some people only see problems, whereas other people see opportunities to solve problems, and help make things go better.
To be successful, discipline is really important. Not only the discipline to get the job done, but the mental discipline to know that you can and will get through it. We need to drive that “stinking thinking” out of our minds. Feelings of failure, and wanting to give up must be controlled. For example, when you get up, you need to fill your mind with positive thoughts, and not a whole lot of negative ones.
Would you get up in the morning, and throw a handful of sand in the crank case of your new tractor, no way, and it is the same with your own mind. Get rid of the energy sapping negative “stinking thinking”, and replace it with positive thoughts.
Music is a very good opportunity to improve your mind patterns.
Optimistic people seem to have the following:
- Better health
- More energy
- Less stress and worry
- Improved immune system
- Better team relationships
- Better productivity
In life, we often do what we feel like doing, rather than what is important. This is particularly relevant to farming. A short term solution may not be best for the long term results. As my dad would say, “do it properly the first time, and you won’t have to go back to it”. How often have we given a task insufficient energy and time, only to have it come back and cause you problems later.
Instant gratification is creeping steadily into society, and into our lives. Achievers and mentally tough people are looking further out all the time, to build better businesses and a better life, rather than going for short term solutions, and instant gratification.
Research in the US done by a Dr Seligman shows the following:
- Attitude is more important than aptitude
- Optimists outsell pessimists by 57%
- Optimists stay employed longer
- Optimists are healthier
- Optimists have more exercise.
SUMMARY
Farming is a tough business. Mental toughness is crucial for survival these days, particularly with the important decisions that need to be made on the farm, on a minute by minute basis.
We need to think about where we are going, and what we are doing, but most importantly, keep control of our minds, and watch out for all those negative thought patterns.
Mental toughness, and a better attitude can actually be learned, but it takes time and energy.
