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What Contract Rate Should I be on?

Updated: Mar 11

This is a question asked a lot at this time of year when everyone is just getting their head above water after calving and mating and are now looking ahead to the next season and what job opportunities there are. Unfortunately, there is no set rate for each level of production or cow numbers as no farm system is the same and has different responsibilities.


You should instead be focusing on the level of skill required and risk incurred to operate the job and what a fair remuneration is for that skill and risk. Federated Farmers done a fantastic webinar on this which is well worth a watch, however this provides a brief summary.


Work backwards


The calculation to determine a fair contract rate is to add up what a farm manager would be paid, plus the costs incurred including plant replacement, plus a “risk premium” and divide this by the total milk production.


Farm Managers wage


Wages have increased significantly in the last 12 months and the wage you enter into your calculation has a large impact on the contract rate that comes out the bottom so make sure to get this correct. Federated Farmers publish a yearly remuneration report which is a good starting point and shows that for the 21/22 season farm manager wages averaged ~$83,000 - $91,000.


Costs


Make sure to get these correct as they also have a large impact on the bottom line. Ask the farm owner for actual figures, consult your accountant, and add a buffer (especially important now). Some expenses that people miss in their budgets are ACC levies, home office, accounting fees, subscriptions, plant replacement, staff training, finance costs, and bits and bobs such as tools, fencing equipment, tail paint etc.


Risk premium


The risk premium is the additional income you should receive for taking on more responsibility than you have as a farm manager. This includes risk of production fluctuation, employing staff, additional workload such as NAIT, environmental reporting, and health and safety. The average risk premium for the 20/21 season was calculated by DairyNZ as ~$30,000 with some achieving premiums of up to $150,000.


Some of the factors that influence the risk premium include skills required for the job, staff numbers, level of farm owner/consultant oversight, infrastructure, and farm system.


Example


As an example, you are considering a contract milking position for 700 cows producing 300,000 kg MS (3-year average). You work out your total costs come to $260,000 and a farm manager in this position would be paid $120,000 (excluding house). You decide a fair risk premium is $50,000.


Adding $260,000 + $120,000 + $50,000 = $430,000 Divide total cost by production = $430,000 / 300,000 kg MS


Contract rate $1.43/kg MS


*Please note these are made up figures and not to be relied on as fact. You are best to contact your accountant or farm advisor to discuss.


This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.

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