For well over a century, New Zealand’s dairy industry has prided itself on the opportunities it gives to young people entering the sector. The system in New Zealand is a bit like climbing a ladder. At every rung of the ladder, there are opportunities for progression.

Share-milking has been the traditional route for most New Zealand farmers to get into land ownership. In a share-milking arrangement, the share-milker provides the cows, labour and machinery and the landowner provides the land and infrastructure. The milk cheque and certain costs are split 50:50.

To become a share-milker, you need to own cows. In New Zealand, you can secure a loan from the bank on a herd of cows with just the cows as collateral. The banks will lend up to 60% of the value of the herd.

Successful share-milkers use the free cash from running well-managed farms to pay down debt as fast as possible, increasing their equity or net worth. Because they own the stock, and because with good management and fertility stock accumulate over time, share-milking is a fantastic tool to increase equity.

This equity is then used to get to the next stage – land ownership. In many cases, a portion of the herd is sold and used as a deposit to buy a farm. Some share-milkers might have to wait 10 years until stock and land values are aligned, but some of the more successful share-milkers have done it much faster.

Issues

Over the last number of years, as herds have got larger and land have increased, it has got harder for share-milking couples to achieve land ownership. The number of smaller, start-off farms has decreased, as farm sizes have increased.

The huge rise in land values has meant that land ownership is out of reach for many. Prime dairy land is still readily making in excess of NZ$50,000/ha (€12,400/acre). As a result, larger farms (greater than 800 cows) are relying more and more on managers to run the business. Without buy-in or ‘‘skin in the game’’, the performance of farms run by managers can be lower than farms managed by share-milkers.

In response to this situation, some landowners have been innovative in their approach to attracting and retaining staff and giving them opportunities to own land.

Jim van der Poel, is a major landowner in New Zealand, with ownership of many thousands of cows, either in his own right or through equity partnerships.

It is through the use of equity partnerships that Jim is giving his staff the opportunity to own farms. This week, I met Jim and equity partner Will Grayling in Canterbury in the South Island.

Will’s relationship with Jim began in 2008 when Will was hired to manage a 750-cow farm belonging to the Spectrum Group, of which Jim was a major shareholder. By 2011, Will was managing the 1,800-cow herd for the Spectrum Group at Singletree Farm.

In 2012, the Spectrum Group split up and Jim took sole ownership of Singletree and Chertsey Farm, which is next door to Singletree. At the time, Singletree had 463ha and 1,800 cows, while Chertsey had 210ha and 840 cows.

In 2012, at the age of 26, Will had built up cash savings of NZ$150,000 (€90,000) – enough to purchase 100 cows. With both partners anxious to work something, the two began negotiating on setting up an equity partnership.

Two companies were set up. Ashpouri Ltd is a 50:50 share-milking company that is 30% owned by Will and his wife Kim and 70% owned by Jim van der Poel. Ashpouri is the share-milking company in Singletree and Chertsey Farms, so it now owns 3,340 cows.

Ashpouri is also a shareholder in the second company, Singletree Dairies 2013 Ltd, which owns the 621ha Singletree Farm (158ha were purchased in 2014 and 700 cows were added). Ashpouri Ltd is a 30% shareholder in Singletree Dairies with the remaining 70% owned by Jim van der Poel.

Based on current land and stock values, Will and Kim’s shareholding is estimated to be worth about NZ$4.29m (€2.6m) as they personally control 30% of the stock and 9% of the land. How is this possible considering they only had NZ$150,000 to invest in 2012?

The equity partnership between Jim and Will is structured in such a way that Will is buying into the business over time. While his personal shareholding is worth NZ$4.29m, approximately 90% of this is borrowed with Singletree Farm used as security for Will’s loan. So, Ashpouri Ltd earns profits of which Will and Kim get their share, but they are also paid a wage for managing the farm.

Remember, this is a massive operation involving over 3,300 cow,s so their salary is high at over NZ$180,000 (€110,000) per year and some of this is used to pay back the loans taken out for their shareholding in Ashpouri Ltd. The farm is on track to make an operating profit of NZ$1.70/kg milk solids (MS) (€0.7c/l). This is before interest of NZ$1.40/kg MS (€0.6c/l) is paid. Singletree Farm produces 1,770kg MS per hectare and is stocked at 4.2 cows per hectare, with about 1t of supplement fed per cow.

There are 11 staff on the farm and all the cows are milked through one 80 bail rotary. There are five herds of 500 cows each and Will has full responsibility for the whole farm. A contract milker is employed on the Chertsey Farm where 840 cows are milked.

“For equity partnerships to work, both parties need to be closely aligned. The shareholder’s agreement at the start is crucial. It’s almost like a marriage and a divorce agreement rolled into one. I have similar views to Jim and we communicate well. I’m much happier owning a small slice in a very big pie rather than owning a big slice in a small pie,” Will says.

While Will was able to borrow to buy his shareholding in the equity partnership using the farm as security, importantly, he cannot leverage his equity in either company to finance investments outside of the equity partnership.

Creating a win/win agreement in any business venture is often very difficult. In my view, equity partnerships work best when there is equal shareholding between the partners. Yes, over time, Will and Kim’s equity in the business increases as they pay off debt and as the business grows. But they are not getting this for free – they are buying into the business.

Jim is not giving away land. He is offering people like Will an opportunity to purchase land over time. In return, he is effectively tying them down and locking them in, albeit with an opportunity to grow. Almost like golden handcuffs, they have a great asset but find it hard to get out of it.

That is not to detract from what is good about this use of equity partnerships. From Jim’s point of view, he has a farm operating at top performance and has a couple running it on top of their game. They have a vested interest in both the cows and the land – something that is not always the case in share-milking.

I can see a variation of this type of arrangement, having a role in Ireland, particularly around succession of family farms. It could work really well as an intermediate measure before full transfer of the business.