Buying land for £13,000/acre (£32,000/ha) or renting at more than £250/acre (£6,100/ha) in dairying areas is extremely challenging for a young business without much equity.
However, if you are young, skilled and capable of providing quality labour, you are a big asset to an industry short on staff.
And while dairy farming is capital intensive, there are ways landowning farmers can keep control of their farms, while giving new entrants a foot on the ladder.
This is according to Andy Dodd of the Farm Consultancy Group. Mr Dodd believes that without open-minded progressive business agreements the industry will fall into fewer and fewer hands.
Here, he explains how new entrants to the industry can both grow their balance sheets and set out on a path to farming in their own right.
Equity building by buying cows
Scenario: You are a farm labourer who has a good relationship with the farmer. You already either have or have access to a smallholding where you contract rear heifers and buy beef calves off the farmer.
You want to acquire the skills and grow your balance sheet by acquiring cows, but have limited resources and buying power at local sales.
What is it? Cows are acquired over months/years in lieu of wages or by using off-farm income. Cows are often farmed on the original owner’s holding.
How it works: There are a variety of options to explore:
- Buy heifer calves and rear them as part of a contract-rearing enterprise.
- Some buy cows in herd and work on a percentage basis, that is you own 10% of the herd, pay proportionate costs and take proportionate returns.
- Income from the cows can be incentive-based for the farm worker – for instance, an agreed performance bonus based on milk quality.
- Cow ownership can be literal – you buy a calf and get paid for the milk, cull value and subsequent progeny, and make the management decisions.
How it helps new entrants
- More predictable than going to sales/dispersals to bid against established farmers.
- Flexibility – cows can be moved on to other holdings, sold back to the farmer, or, if you want to travel, leased back to the farm.
- You soon have income from the cows.
- It’s a chance to start learning about budgets, health cost, etc.
- This becomes your springboard to share milking (see box 1) or when a tenancy or land-buying opportunity comes up.
- Mentality and attitude are critical – keep things simple and fair.
- Simplicity can be created working on averages – cost is X, income is Y, and divide it by the number of cows you own.
- Use book values (AHDB), an auctioneer, or agree a value for cows yourselves.
- Ensure there is a transaction recorded and both balance sheets reflect the changing ownership of the cows.
- Cost allocation to individual cows can be tricky – have a legally binding document detailing how incomes (milk cheque, calf, cull value) and costs (feed, vet and medicines) are shared and whether on a farm average or per cow basis.
- Have an exit strategy, write in review periods and a trigger in case the herd owner wants to sell the herd, loses the milk contract, etc.
- Have a monthly/quarterly review for day-to-day aspects and after three-to-five years have a review to renegotiate prices. Or ccontinue with a rolling agreement – long-term continuity could be important to you.
Scenario: You now own 25% of the cows on your employer’s farm and have acquired some basic day-to-day machinery (quad bike and trailer, tractor, and trailer).
Your employer is keen to see cows stay on the farm but wants to spend less time farming. You oversee heifer rearing and are now showing a good understanding of accounts, budgets and herd management.
What is it
Share farming is when two separate businesses work together on the same holding, signing a contractual agreement to provide different inputs and share profit relative to the contribution and risk to each party.
Unlike a tenancy, there is no guaranteed income for the landowner, just a share of profit in the good years. This means both parties are “hungry” for success.
How it works
- A share farming agreement is unique to each farm.
- It relies on the people, a good working relationship, and the owner wanting to help someone get started in farming.
- The landowner is responsible for providing the land, farm buildings, property insurance, long-term maintenance, and their own expertise and experience. They also provide part of the working capital, which at the start might be the entire herd, machinery, and some inputs (feed, fertiliser). This may decrease as the share milker takes on more risk.
- The share milker is responsible for providing labour and expertise at the very least. They may also provide machinery (quad bike, tractor) and as time goes on and the business generates profit, they may provide working capital (cows, feed, fertiliser) and fixed machinery (milking parlour).
- Profits are commonly split 70:30, 60:40 or 50:50, depending on what else the sharemilker is putting into the partnership other than labour and cow ownership.
How it helps a new entrant
- Far less upfront capital is required compared to buying land or securing a tenancy, which helps cash flow early on.
- The share milker has more available cash to develop the profit-making potential of the enterprise. For example, to invest in technology or consultancy.
- Operational risk (market volatility, animal health, grass yields) is shared with the landowner, helping with stress.
- Landowner can act as a mentor.
- Profit share can be increased by reinvesting in the farm, buying cows, buying machinery, and recalculating the profit share – hold monthly review meetings and an annual profit recalculation meeting.
- Both parties are motivated to work hard to cut costs, increase output and drive profit.
What to watch for
- While there are examples of informal “gentleman’s agreements” out there, it is advisable for each party to seek professional advice and sign a contract.
- Each party will have responsibilities and bills to pay and should keep invoices accordingly.
- Basic Payment Scheme (BPS) entitlements stay with the landowner, so this can limit grant funding availability on the holding if the landowner has a big business.
- Set out plans for stewardship income and forage, reseeding, habitat creation, etc.
- Ensure a review of the terms are written into the agreement – often after the second year.
- Money that is owed can be sorted at monthly meetings to review cashflow for the month. Invoices such as a milk cheque are often one cheque.
- Profit is easiest to calculate on a percentage basis.
- Independent advice can monitor the progress of the agreement relative to farm tidiness, performance, facilities and working relationship.
- Start with a development plan with targets when profit share is renegotiated, based on machinery, cow ownership and cost responsibility – look to have monthly review meetings and recalculate profits annually.
Cow hire agreement
Scenario: You’ve now been share farming for five years, have got to a stage where you own most of the herd and an opportunity to acquire more land has come up next door. You speak to the bank, which lends you money for the land.
A neighbouring farm has a low replacement rate and a good herd of cows and is willing to go into phased semi-retirement.
What is it?
This allows a dairy to hire cows if they don’t have any or would like more, allowing a herd to grow quickly.
The cow owner may want to reduce numbers, enter a phased retirement, or help a local new entrant rather than selling surplus cows and heifers
How it works
The cow owner supplies cows at an agreed replacement rate (say, 25%) and retains ownership, is paid an annual fee and usually keeps cull and calf income.
The owner pays for the breeding and semen. Should the cow be culled or die, then the owner funds a replacement animal.
Hirer’s costs are the annual fee, insurance for the animals, and the running costs of the cow. But they get the milk cheque.
Premiums vary hugely depending on cover, which can vary according to system, and exposure to TB.
A very simple contract agreement should be signed detailing owner and hirer address, cow/farm location, agreement dates, duration, number of cows hired, fee a cow and payment frequency.
The address of the holding where the cows are to be kept should be stated, along with the record keeping and identification responsibilities of the hirer.
Insurance of the cows (usually hirer’s responsibility) details on health protocols and the rights to inspect/check the cows, should be noted.
A hire fee (£150-£200 a cow/year, depending on the cow) needs to factor in a return on capital, which can be 5-10%, depending on interest rates.
How it helps new entrants
- Borrowing might be maxed out to secure land or tenancy, so hiring cows frees up money.
- Gives a set period to save and earn from the cows before deciding whether to buy them.
- Allows dairies to scale up and focus on dairying rather than being distracted with other enterprises such as sheep/beef/arable.
- Can offer very good cow families and genetics that might otherwise not be available.
- Cow hire fees can be managed to suit cashflow of business.
- Depending on the hirer’s finances, it may avoid the need to borrow to buy cows.
- Shares risk.
- Gets milk in the tank and money in the bank quickly.
- Ensure you know how to end the agreement – is it rolling, when is it renegotiated, does the owner want to go back into milking when offspring grow older?
- Establish the hirer’s exact requirements for cow care – health protocols, vaccination policy, mastitis treatment, breeding.
- Cows need to suit your contract, management and system. Consider diet, calving pattern, robustness, health status, breed, milk quality.
- Markets alter, so ensure the cost of hire is reviewed regularly – usually every two-to-three years.
- Have a quarterly meeting to review key performance indicators – profit a cow, health costs, mastitis rates, in-calf rate or pregnancy rate.
- Shop around for insurance.
- Bear in mind that distance between hirer and owner is a factor for monitoring cow health or delivering cows.
Before you get started
- Trust and understanding is vital to work in these ways.
- It helps if you know the landowning farmer beforehand.
- Make sure aspirations and ambitions are understood and aligned.
- There must be a benevolent element to the landowning farmer’s openness with the new entrant – they must want to help them.
- Contracts and agreements are necessary, but people can work on a “gentleman’s agreement” basis – however, what happens if things go wrong and there is a falling out?
- Remember that this is mutually beneficial – the landowner can keep busy, remain in active farming (good for tax reasons) and see their farm continue working as a dairy.
- Many farmers find the idea of retiring difficult – these agreements can be a way of easing into retirement while keeping options open.