A comparison of sharemilking and equity management as pathways to farm ownership: A dissertation submitted in partial fulfilment of the requirements for a Bachelor of Agricultural Science with Honours at Lincoln University

Abstract

A comparison of sharemilking and equity management as pathways to farm ownership was investigated using financial modelling. Microsoft Excel was used to calculate equity and farm size able to be purchased at 3 5% equity after 15 years. The scenarios were based on 2007 /2008 Canterbury MAF data. Sharemilking was found to be the most effective pathway to farm ownership, generating equity of $3,808,633 over 15 years. The sharemilker was able to purchase an economic farm unit of 124,347 kilograms milk solids. The equity manager pathway did not achieve farm ownership. Equity of $1,580,858 was realised, this equated to a 51,613 kilograms milk solids property being purchased, and was identified as· uneconomic. Saved wages were not an effective path to farm ownership. Both scenarios worked for wages for three years initially. The sharemilker spent three years as a lower order sharemilker, then nine years as a 50/50 sharemilker in three increasingly large contracts of 255,504 and 826 cows. The manager became an equity manager in Year 4, remaining in the same position until Year 15. His share of the business increased from 4 % to 7% during this time. The sharemilking scenario final equity and farm size was more sensitive to changes in payout, production, land value increase and cattle value increase than the equity manager. Higher cattle value increases were found to decrease the equity and farm size for the sharemilker, a result that differed from the literature. Rising land value increases were found to increase the manager's equity, however farm size purchased did not increase with higher capital gains. The equity manager's final equity and farm size was very sensitive to changes in annual wage. An increase in annual wage from $80,000 to $120,000 resulted in equity increasing to $4,550,525, which enabled the purchase of a 148,568 kilograms milk solids property. The equity manager's role did not provide a clear path to farm ownership. Small cash returns identified in the model and literature result in the equity manager relying on capital gain for equity growth, however high capital gains did not increase farm size purchased. Other strategies to increase farm size purchased were seen to rely on the benevolence of other equity partnership members. The sharemilking scenario presents a clear path to farm ownership with significant barriers. The sharemilker must be successful in gaining at 250 - cow contract and will most likely be required to move to the North Island. For the last 826 cow contract he would likely return to the South Island, probably Canterbury. The pathway that any individual would choose is,highly dependant on their risk profile. A risk-taker would likely select sharemilker while someone who is risk averse would likely choose an equity manager's role.