How does contract milking differ from sharemilking?

A contract milker is paid a fixed rate for every kilogram of milk solids produced, regardless of what the milk itself sells for. A sharemilker takes a share of the milk income and therefore rides the payout up and down. That makes contract milking the lower risk of the two on price and the higher risk on production: a poor season for grass hurts a contract milker directly, while a poor season for the payout does not.

What costs does a contract milker carry?

Typically labour including their own, some or all of the shed and electricity costs, vehicle and fuel, and administration, with the exact split written into the contract. The farm owner keeps the herd, the feed bill, animal health and everything attached to the land. Because the rate is fixed, every cost the contract milker carries comes straight off their margin, so which costs sit on which side matters as much as the rate does.

What contract milking rate do I need?

Divide the costs you will carry, plus what you need to live on, by the kilograms of milk solids you expect the farm to produce. That gives the rate per kgMS at which you break even, and anything above it is margin. The production estimate is the risky half of that calculation: the same rate on a farm that produces ten percent less than expected is a materially worse business, which is why the rate and the expected production have to be considered together.

Contract Milking Rate Calculator NZ

A contract milker is paid a fixed rate for every kilogram of milk solids the farm produces, whatever the milk itself sells for. This works out what a given rate earns, takes off the costs that side of the contract carries, and turns the whole thing around to give you the rate the business actually needs to break even. The comparison with sharemilking is the useful way to think about it. A contract milker does not ride the payout, which removes the largest uncertainty in dairy farming from their business entirely: a bad year for the milk price is the owner's problem. What it does not remove is production risk. A dry summer that costs the farm ten percent of its milk solids costs the contract milker ten percent of their income directly, with the same costs still to pay, and there is no payout recovery to offset it. So the rate and the expected production have to be judged together, and a generous rate on a farm that consistently produces below its estimate is not a generous deal. The sensitivity table underneath shows what a production shortfall does, because that is the risk this arrangement concentrates.

Advertise on this page

Expected milk solids

kgMS

Contract rate

/kgMS

Labour, including your own

Shed, power and dairy costs

Vehicle, fuel and plant

Administration and insurance

Drawings you need

$18,850.00

left after the costs this side carries

Contract income$134,850.00

Costs carried$116,000

Break even rate$1.33

Margin per kgMS$0.22

Drawings are set to zero by default, so the figure above is what the business leaves before the household takes anything. Enter drawings to see the rate you need including them.

What a production shortfall does

Production	Milk solids	Contract income	Left over
As expected	87,000	$134,850	$18,850
5 percent short	82,650	$128,108	$12,108
10 percent short	78,300	$121,365	$5,365
15 percent short	73,950	$114,623	-$1,378

Ten percent less milk takes $13,485 straight off the margin, because costs stay where they are in every row: a dry summer does not reduce the labour bill.

How it works

Contract income is the milk solids multiplied by the rate. Costs are added together and taken off, and what remains is the margin. The break even rate reverses the calculation: total costs, including any drawings you enter, divided by the expected milk solids, which gives the rate per kilogram at which income exactly meets what you have to pay. The shortfall table reduces production while holding costs still, because that is what actually happens: a dry summer takes milk solids away and leaves the labour bill, the power bill and the vehicle exactly where they were.

The risk this arrangement concentrates

Contract milking trades payout risk for production risk. Removing payout exposure is a genuine benefit and it is the reason many people prefer it, but the production side is sharper than it looks because the costs are close to fixed. Milk solids fall, income falls with them at the full rate, and almost nothing on the cost side moves in sympathy. That is why the break even rate matters more here than in most arrangements, and why it is worth checking against a production figure below the farm's own estimate rather than at it.

Worked example

A contract milker on 87,000 kilograms of milk solids at $1.55 earns $134,850. Carrying $72,000 of labour, $19,000 of shed and power, $16,000 of vehicle and plant and $9,000 of administration comes to $116,000 of costs, leaving $18,850 before any drawings. The break even rate at that production is $1.33 a kilogram. If the season comes in ten percent short at 78,300 kilograms, income falls to $121,365 while the costs stay at $116,000, and the margin collapses to $5,365. The rate did not change and the business is barely recognisable.

Related calculators

Sharemilking Income: the arrangement that rides the payout instead.
Milk Solids kgMS: getting to the production figure.
Break Even Milk Price: the owner side of the same farm.
Dairy Payout Income: the payout risk you are not carrying.
Company Solvency Test Calculator NZ: Applies both limbs of the section 4 solvency test directors must satisfy before a distribution or buy-back, with head...

Data sources: no market contract milking rate is supplied, because rates differ by farm, region, herd size, the state of the plant and which costs the contract carries. Every figure here is one you enter, from the contract in front of you.