Sharemilking Agreements

What is Sharemilking?

For a number of years dairy industry has been an integral part of New Zealand’s economy and a sharemilking arrangement provides a stepping stone for farmers looking to become farm owners themselves.

Two parties exist under a sharemilking agreement, the farm owner and the sharemilker. Essentially, the parties enter into a sharemilking agreement on the basis that the sharemilker is responsible for operating the farm on behalf of the owner, but does not own the land and in return is paid a share of the income from selling milk and anything else produced off the land (e.g. silage). As a result, the legal relationship between a sharemilker and the farm owner is that of principal and independent contractor, not employer and employee.

The key requirement for a sharemilking arrangement is that the payments are distributed between the parties in accordance with an agreed percentage share of the farm’s income.

Types of Sharemilking Agreement

Sharemilking agreements may be classified as either a Variable or Lower Order Sharemilker Agreement, or Herd Owning Sharemilker Agreement (also known as a 50/50 Sharemilker Agreement).

50/50 or Herd Owning Sharemilker Agreement

The farm owner under this type of agreement provides the land, buildings and milking plant, water supply and pump and ensures that the property complies with the requirements of milk buyer (e.g. dairy company). The owner also pays for fertiliser and materials and repairs to buildings, fences, gates and weed control in addition to paying the rates, insurance and any capital costs.

The sharemilker provides the herd, tractors, bikes and implements and meets all of the farm operating costs, and supplies. The sharemilker also provides labour necessary for the operation and maintenance of the farm. The sharemilker also carries out all of the farm work or employs labour, at their cost, to do so.

Variable Order Sharemilker Agreement

Variable or lower order sharemilker agreements refer to any sharemilking arrangement where the parties negotiate the share split from the outset. If the sharemilker provides a herd with less than 300 cows, the minimum share the sharemilker must receive is 21% or greater excluding expenses.

Under this type of agreement the farm owner has  more responsibility; meeting a majority of the farm costs and outgoings as well as supplying the land, buildings, milking, plant and water supply pumps, the tractor and farm implements. In contrast, the sharemilker does not provide the herd or may only provide some of the herd. They provide the labour, meet the shed expenses and cover some of the costs such as electricity and may provide a small amount of equipment such as bikes or tractors.

Obviously, the farm owner’s share will be significantly higher than the sharemilker’s share; which is proportionate to the costs and resources the farm owner provides under this type of agreement.

Considerations

A farm owner considering a sharemilking agreement should be cautious that they are not providing a lease to the sharemilker; rather a licence allowing the sharemilker to use the land. If the agreement creates a lease between the parties, the sharemilker may have the right of exclusive possession of the land, which could result in the owner having restricted access to their farm.

Anyone considering becoming sharemilker should be aware that they will become an independent contractor rather than an employee and as such cannot rely on the Employment Relations Act 2000 to settle disputes with the farm owner. Additionally the sharemilker will have to obtain an IRD number and become GST registered. There are a number of uncertainties and considerations to make when entering into a sharemilking agreement. Having a sturdy, easy to follow and encompassing agreement in place will remove uncertainty around the roles and responsibilities of the parties, as well as providing you with the confidence to go about your business.