Share the future

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You’ve heard the familiar lament that there aren’t enough young people entering the dairy industry anymore. It’s too capital intensive, too difficult, too this, too that, naysayers note. Just don’t tell that to Matt Hartwig.

This 20-something producer, along with his brother, Mark, have eagerly embraced a dairy career on a 150-cow farm near New London, Wis. Hartwig is part of a non-traditional dairy business structure called a share-milk arrangement with his former employer, Robert Eder. Each brings assets to the business and they split the milk check. However, they are not partners, nor are they shareholders in a corporation. Each has his own business that depends on the other for success.

This concept, while not new, enjoys significant interest and offers opportunities for transitioning the business. Here’s why some people should consider a non-traditional business structure like a share-milk arrangement.

Attitude is everything

These agreements can work well when young people with the drive and desire to own a herd of cows can be matched with an experienced dairy producer who’s not yet ready to retire from the business, but no longer desires to milk cows, explains Gary Snider, farm-business consultant with Farm Credit of Western New York.

In addition, share arrangements can be used to expand your dairy business, while limiting your risk. This can be useful when bringing the next generation into the business, to facilitate retirement, to share workloads or to focus your talents on another business venture without exiting the dairy.

An analysis of Eder’s financial records showed that a share-milk arrangement would work well for his situation. “We needed a higher return for the farm than would be possible with a cash rent to service our real estate loan,” explains Eder. “We were willing to share risk to increase returns.”

The possibilities are numerous, says Snider. “But the key ingredient for success is the attitude of the parties involved.” A producer who can’t see how such an arrangement can work won’t be able to make it work.

If you aren’t willing to look at your dairy business in a different light, or be willing to cede control to another person while helping them get a leg up, then these arrangements are not for you.

Furthermore, you have to get over the fact that the young person might make money. “You have to want the other party to succeed instead of thinking, ‘I could have charged more,’” insists Snider.

Separate businesses

A share-milk arrangement involves two separate businesses working together. Assets are not jointly owned, nor does the arrangement contain any gifts.

Depending on the agreement, the dairy manager generally owns the dairy business and the landlord owns the land and facilities. Cropping may be the responsibility of either party, but not both. The dairy manager compensates the landlord with a percentage of the milk check. And the income and expense split commonly ranges from 80:20 to 50:50, or anywhere in between.

For instance, Hartwig contributes the cows, all mobile equipment and labor to the venture. Eder contributes the land, house and milking equipment. Their 50:50 split of the milk check was decided after they figured the fixed cost value of these assets and the variable cost of the operation. In order to determine a fair and equitable split, you must run the numbers.

And each arrangement, and subsequent split of the milk check, must be tailored to the business at hand. You can’t just copy your neighbor.

“No two arrangements I’ve been involved with have been set up the same way,” says Larry Tranel, Iowa State University extension dairy specialist based in Dubuque, Iowa.

Non-traditional advantage

Unlike partnerships, limited liability companies and corporations that bring a lot more legality and formality into the system, a share-milk agreement can be executed by drawing up a simple contract.

Share arrangements also reduce risk, especially for the younger party, says Tranel. But, he cautions, it may also reduce profit, since risk and profit go hand-in-hand. That’s why doing the calculations to determine an appropriate split is so important.

“I think it’s a good way to get started,” says Hartwig. “My ultimate goal is to own my own dairy. In the meantime, we’re using Robert’s equity and experience and a younger guy’s energy and new ideas in a profitable venture. I’m building my own equity, and Robert is able to dairy in Australia.”

The agreement pushes everybody to do a good job, providing an incentive for everyone to make smart decisions that add to the farm’s profitability, Hartwig adds. “We both still share the risk.”

These arrangements also have tax implications, depending on how they are set up. For example, for landlords who receive rent for farmland and are not involved in the farming operations, those funds are considered rental income rather than farm income and are not usually subject to self-employment taxes.

Final analysis

“I’ve seen scores of young people over the years with lots of talent and drive to be in the dairy industry that haven’t been able to get a good start,” says Snider. Often, there is a nearby, well-established farmer who no longer wants to milk cows. “I believe that each business entity can become a success by working together,” he adds.  In many instances, this type of arrangement can be much more feasible than either party working on his own.

Matt Hartwig and Robert Eder have made it work.

“Matt has done a super job, and deserves a lot of credit for making it work so well,” concludes Eder.


Contract Considerations

A good contract for a share-milk arrangement is unique to each situation, but nearly all arrangements and their preceding conversations must address the following:

  • Fairness. “If an agreement is not fair, then it invites its own destruction,” says Larry Tranel, Iowa State University extension dairy specialist. One party cannot succeed at the expense of the other party.
  • Responsibilities. You must decide up-front who will be responsible for what. Who provides the breeding tools, parlor supplies, feed, and so on?
  • Assets. What assets does each party bring to the table and what is the value of each? Use a spreadsheet to determine these values. An example can be found by following this link (PDF file).
  • The split. Use the values calculated above to determine the appropriate milk check and expense split.
  • How will you handle unforeseen circumstances? “There must be give-and-take because there are always going to be situations that crop up in the gray area,” says Tranel.
  • How will communication be handled? Gary Snider, farm-business consultant with Farm Credit of Western New York, recommends that parties sit down every six months to discuss their situation and whether it is still fair and equitable.
  • Third-party oversight. Bring a third party in to help write the agreement, suggests Wisconsin dairy producer Matt Hartwig. “Our banker played devil’s advocate. We tried to come up with every reason for the arrangement not to work, then came up with a remedy so that it would work.”
  • Think positively. “It really helped our situation that (co-arrangement party Robert Eder) can turn almost anything into a positive,” Hartwig adds.
  • Dairy profitability. The experienced party’s dairy must be profitable before the share-milk arrangement ever begins.
  • Recruit good people. Continually talk to people in your area who may be candidates for a successful share-milk arrangement someday.

 



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