Setting Contract Milking Rates
It’s a question that is incredibly complex in trying to answer, how much should you be paying your contract milker? With just under a third of contract milkers making less than they would be as an equivalent manager, and this having a terrible flow on impact to labour supply in the dairy industry as these contract milkers fall into debt and leave the industry, its something all farm owners with contract milkers need to work to address.
A contract milker has substantial risk as a business owner and their remuneration needs to reflect this - especially if you are trying to reduce contract milker turn over, have high expectations of farm maintenance and if they are completely responsible for managing all contractors, paper work/compliance, and they have to employ staff.
Why is it a problem that a contract milker is paid less than a manager in the same role?
The risk taken as a business owner is substantial, and it is a myth that contract milkers aren’t impacted by fluctuating milk price. In fact, contract milkers are more likely to be negatively impacted by milk fluctuations - a falling milk price commonly sees reduced milk production through reduced feed and nitrogen inputs but contract milkers don’t have the buffer a sharemilker would have from a higher milk price. The contract milker is also more likely to have higher wage costs for their staff than an owner operator due to a combination of inexperience as an employer.
As an industry in a labour shortage, retention of high quality labour is an all of industry issue. Under paying contract milkers (among other bad behaviour) has led to contract milkers leaving the industry completely. We are also seeing the financial gap to farm ownership continue to grow, an issue that will be realised over the coming years as fewer sharefarmers can afford to buy farms.
What can you do to calculate a fair contract milking rate?
Early in 2022, DairyNZ launched the Contract Milker premium calculator which is available to download from their website (find it here). The calculator works by completing a detailed budget for the contract milker, a similar managers budget to account for the business benefits of a contract milker and holiday pay a manager gets, and then compares the two to identify if there is a premium above that of the manager and how much. The next question is how much should the premium be? In my opinion this should be a able to account for fluctuations in production of plus or minus 5%, and for inflation of expenses (some crystal ball grazing required but this has sat around 4-5% the last 12 months).
What if this is more than you can afford as a farm owner?
In simple terms, you cant afford a contract milker. In the last year I have spoken to dozens of contract milkers who have been taken advantage of either through their own nativity or by farm owners deliberately using false figures at the time of agreement or pressuring the contract milker to sign before they have sought advice.
If you find yourself in a position where you cant afford a contract milker, employing someone (or a team) directly will allow you to be in control of these costs, remove the need to pay a premium to the contract milker and have more day to day control of the profitability of the system. Alternatively, if you do still want a contract milker (or other sharemilker) I recommend working with your accountant to make changes to your financial position.
What are the benefits of paying better?
Example: You have had high turnover of staff or contract milkers over the past 5 years, and no one has stuck with the farm for more than a season. In this scenario, animal health costs and empty rates are likely to be higher as the contract milker or staff member is always in a settling in period. Feed wastage is also likely to be higher, as well as pasture management inefficiencies for the same reason. By having a contract milker who is able to afford to take some weekends off, feels like they are remunerated for the hours of work they are doing, and can afford the staff they are expected to have, they can focus on the other efficiencies. Especially where feed and herd improvement are concerned, you should expect a 5-10% increase in milk production over a 3 year period as the contract milker has gotten to know the farm and costs should begin to decrease as they become more efficient.
In financial terms, if you have a 150,000kgMS farm and your milk production increases by 5% in a $7kgMS payout, your opportunity cost for underpaying a contract milker is $52,500 per annum in lost milk production.
Remember – just because you can underpay a contract milker, it doesn’t mean that you should.
Article with edits first published in Morrinsville News, January 2024
