What are the issues surrounding 50/50 sharemilking?

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 i.e. 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, i.e. 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 each	$450,000
70 R1s @ $400 each	$28,000
Total Stock Purchases	$480,000
Tractor etc.	$100,000
Working capital	$75,000
Legal fees	$5,000
Shift costs	$5,000
Unforeseen	$10,000
Total costs of the new business	$675,000

SECURITY MARGIN

Stock	$480,000
Tractor	$100,000
Total Security	$580,000
Tractor etc.	$100,000

Maximum lending rate is 60% therefore:

Maximum amount of loan	$348,000
Total cash required	$327,000

Please note the following key points:

• The bank will use their own valuation of the stock, not necessarily the purchase price.
• 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%	$285,000
Boners and Bobbies	$15,000
Gross income	$300,000

DEBT COST

$348,000 @ 8.5% interest	$29,580
Principal repayments say	$60,000
Total Annual Debt Cost	$89,580
Debt Servicing Ratio is	29.86%

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 to 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 it.
• 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.