Contract milking and profit sharing budgets

Contract Milker

In this example the contract milker would occupy a managers home as part of fulfilling the contract, would be able to draw a $100,000 ‘pre-tax salary’ from their contract milking business, and is forecast to generate an operating profit after tax of $13,000 in year one, growing to more than $30,000 after the third year.

Contract Milker or Manager also earning a share of profit

Below is an example of how profit share is calculated.

This example is based on a contract milking rate of $1.05/kgMS and a share of profit or EBIT set at 25%.

Below is a typical budget for our example 600 cow dairy farm. 

In this case:

• The EBIT target is $660,000 or $2.75/kg milksolids. 
• The share of profit calculation is at 90% of this level or $594,000.

If the actual EBIT turns out to be $726,000, the calculation would be as follows;

• Step 1 - calculate the amount of EBIT above target:            $726,000 - $594,000 = 132,000
• Step 2 - calculate pre-tax payment:                                          $132,000 * 25% = $33,000
• Step 3 – calculate after tax payment:                                      $33,000 * 72% = $23,760[1]

A farmer can increase EBIT by increasing production (which will increase their contract payment too), through an increase in the milk price and through managing costs.

The EBIT target for the farm over five years is shown below.  These forecasts would be refreshed each year to take account of actual production achieved, cost changes (some inflation is already assumed) and the milk prices being announced by Fonterra.