June 19, 2009

Buying and selling a dairy herd: A guide for purchasers and vendors. Part 2: Purchasers’ advice.

Agriculture, farming, husbandry, management, business, trading, buying, selling, practical advice, purchasers, vendors, contracts, avoiding pitfalls.

Part 2. Purchasers’ advice

By Ric Dawick

Vendors also take note: This section contains valuable information that will assist you in selling your herd.

Rule 1. Seek quality advice - Find yourself a mentor.
  • Seek quality advice from people with a reputation in the business.
  • They need to be professional, sincere and candid.
  • You want people who will tell you the truth, and not what you want to hear.
  • Buying your first herd is both an exciting and scary business – and your emotions can easily get in the way and out of control.
  • Find someone knowledgeable in the dairying industry who you respect, to act as a sounding board or mentor.
  • Their job is to keep your feet on the ground, and keep you focussed on cold hard facts and not what you may want to hear.
Rule 2. When using a Specialist Dairy Agent or Stock and Station Company.
  • It’s vital that besides being competent, your dairy Agent’s company must have a sound financial backing.
  • Your credit worthiness will be checked, so do the same to your Agent, bearing in mind that you will be entrusting large capital funds to their company’s care.
  • Request an “Annual Report” or perhaps a prospectus from the Agent’s company.
  • If you find these reports difficult to follow, get some independent professional help to explain them to you.
  • Check the Agent’s company are a financial member of the New Zealand Stock and Station Association. This is a positive sign demonstrating that they have a highly responsible attitude to their business.
  • You have much at stake, and you owe it to yourself and others to have all this checked out should something go wrong.
  • Top Agents stand out (enquire through your farming mentor) and will be well known in the business. They are professionally thorough, will take time over negotiations, and more importantly, are genuinely interested in you and your future.
  • They realise you have much at stake and want your repeat business. So it’s clearly in their interest to look after you.
Rule 3. Give clear instructions.
  • Give your Agent clear instructions. An Agent cannot read your mind!
  • Your Agent will treat your financial situation and arrangements in strict confidence.
  • Inform the Agent fully about your budget and the parameters around it – i.e. how much flexibility you have. However having done so, request client confidentiality.
  • Be totally honest and up-front about this. There’s nothing that wastes more time or causes more ill feeling, than when people find out promised money has not been arranged or is not available.
Rule 4. Do your homework.
  • Do your homework before inspecting the herd. This will save hours of frustration and time.
  • Initially it’s not your job to spend hours or days searching for the ideal herd – it’s the Agent’s job, so use the service provided.
  • If you want to do your own initial research or assist your Agent, request a “Condensed Herd Listing”. This describes the key features of the herd quotes on the Agent’s books at that time.
  • There may be “Sole Agencies” or interesting fringe quotes worth investigation on the list.
  • Better still - check if your Agent has a website containing a comprehensive search engine that you can use to save time.
  • Condensed listings and a well-designed Internet site (with photographs) have the added advantage of being able to view all available herds quickly from your home, thus satisfying yourself that all options have been considered.
Rule 5. Request full formal quotations.
  • When you have selected a herd for further scrutiny from the condensed list or downloaded from the Internet – then request a “Full Formal Quotation”.
  • It’s extremely important that you are satisfied with the following points:
  • That the Vendor has signed a declaration stating that all descriptions contained therein are to the best of their knowledge true and correct.
  • That you are authorised to view and/or investigate any information contained therein pursuant to the Privacy Act 1993.
WARNING! If the above are not declared, then stop until remedied. If it cannot be resolved – then purchase another herd that does comply. Ignoring this advice may inherit unpleasant consequences.

• Formal quotes should be very comprehensive and always accompanied by supportive information.

Rule 6. Arrange finance before herd inspection.
  • Arrange your finances before seeing any herd. Do not be persuaded by well-meaning friends or mentors to visit herds to “test the water”. It wastes vendor and Agent’s time and will not help your credibility when things get serious.
  • Without organised creditable finance, you’re not in a strong position to negotiate with a vendor. You can’t negotiate from strength from a negative position.
  • Your Agent will want to be assured of this before taking you to a herd.
  • If you are a 50/50 sharemilker, your Agent will also want to know if your contract has been signed with your farm owner. Do not look until it has been.
  • Remember to calculate your GST, which is added to the purchase price.
  • GST is also added to the 10% deposit.
Rule 7. Inspect the best three herds.
  • Don’t waste your time or your Agent’s inspecting endless herds – three is ideal.
  • It’s potentially very confusing to look at more than three herds, and indicates one of the following three things.
  • (a) The Agent did not listen to your instructions.
  • (b) Your instructions were not totally clear.
  • (c) You have changed your criteria without telling the Agent.
  • If you don’t get the herd you want after looking at three – change your Agent.
Rule 8. Check the Agent’s Company Dairy Herd Contract.
  • This contract is your safeguard.
  • Don’t get emotionally trapped by signing a poorly-drawn-up contract for what appears to be a “great deal”, even if it seems quite genuine.
  • At the time of writing this guide the best herd contract being used is Allied Farmers Livestock’s 2007 contract. Extensively revised by leading dairying specialists and experienced field staff the contract safeguards Purchasers and Vendors to a new level of best industry practice. Although conceived in 1977 the first contract did not roll out until 1989 due to long-held prejudices of the ‘shake hand’ era not recognising the rising sophistication of the dairy industry.
  • The beauty of Allied Farmers Livestock Limited’s contract is that it is a ‘living document’ thus its reputation for equitable fairness has spread far and wide because of the continuing security it offers. Whether you are a Vendor or Purchaser make it your business to check one out - especially before signing anything else (especially private treaty sales where no agents are involved) – to avoid potential pitfalls. Better still for a fee it can be used for private treaty deals and administered by the company as if it was a normal transaction.
  • Caveat emptor (buyer beware)! While on the subject of farmer to farmer private treaties… A number of these are transacted every season. Many on simple contracts. The main incentive for this is:
  • (a) The Vendor saves paying commission thereby gaining more money.
  • (b) The Purchaser assumes budget savings for the same reason. Both can’t be right. Negotiations invariably end up by agreeing to split the commission down the middle. There lies the irony! Both parties have settled close to market value. While solicitors do a good job the agreement will come at a cost thereby negating some of that perceived commission savings.
  • In 46 years the writer has never seen a solicitor squelching about in mud resolving disputes. On the other hand reputable Stock & Station Agency companies, especially where large capital livestock investment monies are involved, play a more active roll - most of the time gratis.
  • Commission (or a third party fee suggested above) fast becomes a moot point in lieu of the security of a knowledgably controlled well drafted professionally administered contract. Disputes big or small take on a completely different persona when no friendly shoulder is present to lean on to buffer potentially fractious circumstances.
  • Note: 90% of the contract should be about ‘the transaction’ and 10 % about ‘the Agent’ or ‘the represented company’. Should this ratio of legal description be reversed – look out!

Rule 9. Check guarantees and warranties in the agreement.
  • The herd Purchase Agreement must include full guarantees and warranties to protect your investment.
  • Strong penalty clauses must be included, clearly spelling out the Vendor’s and Purchaser’s remedies, should either fail to settle.
  • The main ones to check for are the following:
  • A secure trust account for your deposit (normally held by the Agent’s company).
  • Will you the Purchaser get the interest (less RWT)? You should plus a pro-forma account to assist you claiming back GST prior to the delivery/settlement date?
  • Clear finance conditions, delivery + GST clauses.
  • Clear settlement clause.
  • A comprehensive care clause (Vendor’s contractual obligation to care for your stock after signing).
  • Comprehensive in-calf clause that also covers retention monies for bone fide non in-calf claims.
  • Purchaser’s inspection clause. This is extremely important (see more information later in vendor’s section ‘AFTER PURCHASE’).
  • Rejection rate clause that should also incorporate… an ‘Insufficient Numbers’ clause (protecting the Vendor from not being able to deliver the full agreed tally due to reasonable deletions caused through sickness, deaths or unsoundness) and a ‘ Negative Index Variance’ clause (protecting Purchasers when insufficient numbers negatively vary the indices [BW, PW & RA] too much from the original quotation that justifies a formulated price adjustment according to the severity and/or annulment).
  • A clear Pro Rata clause when sharing a line of stock with another buyer and/or multiple buyers.
  • A comprehensive drying off warranty that includes an agreed somatic cell count threshold + treatment.
  • Calving duration and individual calving clauses (that includes compensation for animals calving too early or late in accordance to their stated dates).
  • Warranties on SCC, TB, EBL plus Lepto inoculation responsibilities stating who pays (based on the inoculation timing), Condition Score, (see Rule 10 for more information).
  • GST and income tax clauses.
  • Comprehensive disputes/mediation/arbitration clauses.
  • Clear data clause spelling out Vendor’s responsibilities.
  • Animal health clauses comprehensively covering Tuberculosis, Facial Eczema and Biosecurity issues.
  • Final inspection clause prior to delivery/settlement.

Rule 10. Herd inspection day
(NB: Assumes an Agent is involved but still largely applicable to private treaty sales as well).

Maybe a good day to go and look at a herd to see how they are being looked after?
  • Take your farming mentor with you.
  • If buying from a sharemilker, will the current employer approve?
  • Ensure the Agent instructs the Vendor to draft out all cattle not involved in the deal before viewing.
  • Unsuitable cows are not part of your normal 10% rejection rate (NB: The reject rate can vary). Only ‘sound and in-calf cows’ are considered suitable for capital transactions. However…
  • Request that the unsound cows are also placed on view for inspection as it will provide you with a ‘management indicator’ of the herd’s wellbeing.
  • Request the vendor be present and if this is not possible – delay your inspection.
  • Head for the kitchen table first with the Vendor to thoroughly understand the herd’s data history before physically inspecting them.
  • It’s here that the vendor will sell him or herself to you – or not.
  • Accurate records are paramount to your success. Make sure they are.
  • Ask the vendor why the herd is being sold.
  • Clearly discuss the average and minimal Condition Scores (CS) required for your farm and how the vendor is going to achieve these by the delivery date. If you buy the herd include the answer in the special conditions clause (for writing in verbal guarantees - every contract should have one).
  • It’s important (and fair) that the Agent emphasises to the vendor before signing that the agreed scores are the very minimum standards expected and NOT the highest and what the consequences could be are if they are not achieved.
  • Be realistic when negotiating CS if herds are situated in challenging areas.
  • In Allied Farmers Livestock Limited’s contract once the condition score clause has been mutually agreed the vendor has a contractual obligation to present the herd regardless of… i.e. droughts, milking longer than agreed ‘Because feed is ‘plentiful’ and so on.
  • The only exception is a ‘Force Majeure’ situation (i.e. extraordinary factors beyond reasonable control such as… floods, earthquakes, disease, theft, etc) however the vendor must immediately notify you (and Agent if involved) in order to facilitate, if possible, any reasonable/practical mitigation.
  • Question the Vendor about the current herd health status and if they are shed drenched or fed supplements during milking.
  • Check the vendor’s culling policy and reasons for culling.
  • 'Double-check the mating programme, calving pattern, and individual calving dates. Check to see if natural matings have been recorded. Investigate this thoroughly, as it’s the cause of many traumas. Ask if you can consult the veterinarian if a PD has been carried out or approach the AB technician for verification on the how the insemination program went.'
  • Observe the milking set-up. Perhaps ask the vendor if you can attend a milking before signing.

  • Appraise the farm as well as the herd. Check things like stocking rate, soil fertility levels, fertiliser use, if crop or feedlot supplements are fed, how many calves are reared and so on.
  • Is the herd is being managed/milked by farm employees? If so it’s important to sound them out. Are they genuinely interested in the herd – sound out their knowledge? Is their attitude keen or is it “Just a job”?
  • Depending on the time of the season when you view the herd… have they been sharp at detecting anestrus cows and accurately recording mating dates? Listen carefully as there is a lot at stake – especially if the Agent’s contract does not have a ‘Individual Calving Date’ warranty (ICDW).
  • (CAUTION:- ICDW penalties are far stricter than ‘Calving Duration’ warrantees'. If neither of these clauses appear in your contract, insist they must be included. If calving goes pear-shaped, you could sustain a financial loss after delivery if you don’t. Conversely, vendors mutually benefit too as the contract protects them from invalid claims.
  • A well-drafted herd will sell itself! However, satisfy yourself that there are no abnormalities other than the obvious 10% (NB: The reject rate can vary) of sound in-calf cows you may reject later.
  • As a last request, if you like the herd, ask the vendor if you can approach some of the farm services – i.e. Farm Consultant, Veterinarian, AB Technician and so on. A positive response will confirm your favourable impressions.
Rule 11. Decision time.
  • If you’ve done your homework well, and are happy with the result – don’t procrastinate. You could lose the herd so move firmly but deliberately.
  • Don’t be put off because it’s the first herd you have seen. If it is, and it meets your criteria – compliment your Agent for doing a good job for you.
  • Go over the contract again with your Agent before meeting the vendor – get everything crystal clear. Ask if the Agent has offered the same courtesy to the vendor. This importantly gives both parties time to thoroughly digest what they are agreeing to or ask more in-depth questions before signing.
  • Have your deposit monies ready (plus GST) for immediate payment after signing.
  • Request a deposit receipt from the Agent and make sure the interest is credited to you. In the Allied Farmers Livestock Limited’s contract the deposit is legally described as ‘a deposit in earnest’ meaning… ‘in part payment’ and therefore does not pass over to the vendor (as Real Estate deposits do) and accumulates interest is in the Purchaser’s favour. When Allied’s contract was first reviewed by Federated Farmers they were especially praiseworthy that purchasers’ deposit interest went towards payment – especially where sharemilkers and first time dairy farmers were involved.
  • Also query if you will receive a monthly trust account statement appraising the current accumulated interest – if not request that you do.
  • Check that you will get a competitive interest rate.
  • Negotiate with authority and make a realistic first offer for the herd. Keep in mind that the Vendor’s comprehensive guarantees and warranties are worthy of respect.
  • Once your offer has been accepted, the vendor, your Agent and you need to spend some quality time signing the agreement. This allows time to discuss again the contractual obligations and will avoid problems between signing and delivery. Don’t be rushed!
  • Congratulations! You are now a “secure” owner of a dairy herd. Don’t settle for anything less.

Rule 12. After the contract has been signed - inspection and drafting tips.
  • Inspections: If the weather turns dry shorten your regular inspections to fortnightly ones. February to April is the critical time for vigilance. Responsible vendors will keenly discuss events and negotiate actions for mutual benefit.
  • Drafting Rejects: Do your homework well beforehand to determine prospective culls. Make it a condition that the vendor keeps you updated with the latest Herd Testing data, non in-calf cattle, deaths and culls.
  • Give the vendor the tag numbers of the 10% (NB: The reject rate can vary) sound rejects so they can be drafted out before you arrive on the drafting day for easier viewing and to alleviate separation stress. Better still – definite goers should be declared to the vendor asap, especially if conditions are dry, to facilitate early disposal.
  • On drafting day, when drafting your rejection rate of sound stock, take your mentor along with you.
  • On arrival walk through the herd and with your mentor’s help, reject any on eye appraisal. A sincere vendor will assist you here by making helpful suggestions.
Draw up 5 columns on a sheet of paper and record cows that fail on these criteria:
  • Poor final herd test results.
  • Late calvers.
  • High SCC cows.
  • Low PW (more important than BW).
  • Miscellaneous.
• If a cow appears more than once in a column, then she is a possible reject.

AFTER PURCHASE ACTION: To ensure a smooth delivery/settlement.
  • Confirm your delivery date early with the vendor especially if inter-island. This enables the vendor to plan a feed budget in order to achieve the agreed condition scores plus give carriers time to organise fuel saving back-loads with the good chance of a lower transportation cost.
  • Plan ahead for the drafting and final inspection days. On the signing day with the vendor diaries in advance the dates you will perform inspections. Request all parties (if going through an Agent) are to be present on those days. If adverse climatic conditions prevail, shorten to fortnightly inspections.
  • Inspections: At the very minimum you, or your nominee, should inspect the herd at monthly intervals. This is very important. It not the responsibility of your Agent or the Company to keep an eye on them. It’s your’s! In responsible contracts purchaser inspections are a contractual obligation.
  • If you are not available to carry out any monthly inspection, then employ a registered Farm Consultant, Veterinarian or a trusted third party to act on your behalf. Responsible vendors appreciate consistent constructive feedback on their herd’s progress.
  • If the vendor is busy on the farm on a inspection day ask if you can pass your impressions before leaving. Solutions for any problems are more easily resolved when all parties are timely informed and can indulge in open and honest rapport.
  • It is also very important that you, or your nominee, complete a final inspection one week before the Delivery Day. Make a checklist of your contractual rights, and obligations, and carefully work through them before uplifting any beast. Once loaded onto trucks or driven off the vendor’s farm certain vendor contractual responsibilities immediately cease. Do not be caught out!
  • Delivery Day – Double check all tallies.

  • Preferably with the vendor present, check the tally with the Carrier’s when counting livestock onto trucks. If you do not agree count them again until you do.
  • If you are unable to be present on the vendor’s farm meet the carrier to count off at the destination – particularly if the cattle are being agisted on a grazing farm.
  • If there are any tally variances where you or the vendor could not be present then the carrier’s tally will be deemed legally correct.
  • Whether you are tallying at the beginning or the end of the delivery you should always ask the Carrier to confirm the tally in writing regardless.

  • Count the stock twice into a paddock near the boundary gate before exiting the vendor’s property. Once your cattle have left the vendor’s farm boundary tallies become your responsibility.

Ear tagging
  • Do it before leaving the vendor’s property.
  • Herds coming on new properties have to put up with a lot upon arrival - prodded off trucks, strange sheds, jabbed with needles, ear tagged etc. Not a great introduction to a new milking shed is it?
  • The remedy is to tag on the vendor’s farm so they will not associate the new shed with pain and stress.
  • Another important aspect for tagging on the vendor’s farm is to confirm that all lifetime ID’s are correct and perfectly match the Vendor’s LIC or AMBREED records before inputting them onto your data base. It’s a job that has to be done sometime so get it right on the vendor’s farm - not yours.
  • Tagging errors are more easily dealt with before delivery too, and becomes even more important if the vendor’s farm is separated by the Cook Straight.

Condition Scoring upon arriving on your Employer’s farm

  • Approximately one week after the herd has arrived, arrange to have all animals professionally condition scored with your employer present.
  • Record the result into your sharemilking contract.
  • Note: Ensure that all parties initial the addition to the agreement.
  • When your sharemilking tenure finishes, ensure that 'incoming condition score' becomes the benchmark for the herd’s 'outgoing condition score' upon leaving the employer’s property.
This material is provided in good faith for information purposes only, and the author does not accept any liability to any person for actions taken as a result of the information or advice (or the use of such information or advice) provided in these pages.

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