Buying standing hay crops in 2016

Establishing a fair price for standing hay – the numbers have changed.

The agreement to buy or sell a standing crop of hay is always a complex one. For one there are many different ways to make the agreement and secondly the economics of the agreement do change from year to year. Compared to a few years ago hay prices have softened, fuel and fertilizer prices are lower, and even land costs may be lower for some, so the value of a standing crop of hay may not be what it was a few years back.   

Below are examples from Michigan State University Extension for both alfalfa (dairy quality hay) and alfalfa/grass (livestock quality hay) using a formula that considers the buyer-harvester price/acre to offer and the landowner-grower price/acre to ask. Somewhere in the middle of these two projections lies a negotiated fair price for both parties.

Example of Buying Standing Alfalfa Field (dairy quality hay) For the Season

First let’s determine what the harvested hay crop may be worth. If from historical yield records and/or experience it is determined that the field could yield  5 ton/acre  of 16% moisture hay for all four cuttings then the value of alfalfa hay harvested may be around $800/acre (5 ton X $160 per ton). But the buyer is doing all the harvest and hauling, plus is assuming the weather risk, so their cost for this could be $434/acre assuming 4 cuttings (table 1).

Table 1.  Buyer-harvester costs/acre for four cuttings of alfalfa hay

Mowing 4 cuttings, raking 2 cutting

$74

Baling 14.3 large square bales/acre

$151

Bale hauling

$63

Weather risk (15% of hay value)

$120

Dry matter handling loss (2% of crop value)       

$16

Other misc. costs,

$10

Total Harvest Costs Per Acre

$434

What the buyer can then afford to pay as a maximum is $366/acre for four cuttings ($800 - $434 = $366) which is the value of the harvested crop less their harvest costs. 

The landowner/grower’s acceptable minimum price incorporates all land production costs and does vary geographically across the State of Michigan.  Land values and rental rates are approximately double in Southern MI compared to what they are in Northern MI. To learn what the land values and leasing rates are for your region you may go to:  2015 Michigan Land Values and Leasing Rates. These rates are published annually by Michigan State University.  In Southern MI, the landowner-grower costs might be $356/acre for all four cuttings (Table 2). In Northern MI the landowner-grower costs will be lower at $297/acre.   In addition to land cost, this minimum price will also cover the landowner’s annual cost of fertilizer, property taxes, and the cost of the hay stand establishment prorated over the life of the stand (Table 2).

Table 2.   Landowner-grower costs/acre for the season

 

Alfalfa

Alfalfa/grass

Fertilizer topdress

$123

 

$75

 

Seeding costs

$83

(4 yrs)

$28

(10 yrs)

Taxes & insurance

$30

 

$20

 

Land costs

$120

$61*

$120

$61*

Total Landowner costs

$356

$297*

$243

$184*

 

 

* Northern Michigan

A number somewhere between the buyer-harvester’s maximum price of $366 and the landowner-producer’s minimum price of $356 in Southern Michigan (Table 2) may provide a “fair” price for both parties. This negotiated price between the max and min may be the median average of $361/acre. If so, it can be broken down per cutting to: $144/acre for the 1st  cutting; $108/acre for the 2nd; and $54/acre for the 3rd cutting, and $54/acre for the 4th cutting using the average cutting yield percentages of 40:30:15:15 respectively.

Now let’s look at alfalfa/grass mixed hay that has less yield and value but also less input costs.

Alfalfa/grass mixed field (livestock quality hay)

3.0 tons/acre @$85/ton = $255/acre of hay value for two cuttings;

Minus buyer’s cost of harvest and weather risk $159/acre for two cuttings (table 3);

Equals buyer’s maximum pay price of $96/acre for two cuttings ($255 - $159 = $96)

The landowner’s minimum price to accept may be $184/acre for the two cuttings for Northern Michigan (Table 2 alfalfa/grass). This minimum price will cover the landowner’s annual cost of fertilizer, property taxes, and pro-rated annual cost of hay stand establishment assuming a ten year life for these stands with more grass. If the buyer pays the landowner’s minimum price of $184/acre they must hope the yield will be larger than the estimated 3.0 ton/acre as the price is more than their suggested maximum price to pay of $96/acre. This example points out that with today’s higher costs of production and lower hay values for average quality hays that hay yields of 3 ton or less per acre may not  be a profitable venture. Proper rotation and establishment of new hay stands is advised for low yielding stands.  In reality some landowners have stopped fertilizing alfalfa/grass mixed hay fields with the goal of lowering their costs to come closer in line with the value of the crop.

Table 3.  Buyer-harvester costs/acre for two cuttings of alfalfa/grass hay

Mowing 2 cuttings, raking 1 cutting

$36

Baling 6.9 round bales/acre

$69

Bale hauling

$18

Weather risk (10% of hay value)

$26

Dry matter handling loss (2% of crop value)

$5

Other costs, insecticide, etc.

$5

Total Harvest Costs

$159

Rather than estimating the yield of hay at the beginning of the season, it can be more accurate to agree on a percentage split and the pay price of the forage at the beginning of the season. Following harvest, the forage yield is measured and payment is made accordingly at the end. 

As an example for alfalfa hay using the first example above on a bale or ton basis, if the buyer provides all the harvesting cost and assume the risks of harvest, then a split of the harvested crop would be approximately 44% of the crop, or its value, going to the landowner-grower and 56% going to the buyer-harvester (negotiated fair price to charge of $354/acre divided by the total estimated value of $800 = 0.44).  If the buyer makes a square bale weighing 650 lbs. and the two parties agree to price all hay at $160 per ton then each bale should be worth $56/bale (650/2000=0.325; then 0.325 X $160=$52) and the 44/56 split would then pay the landowner $22.88 for each bale produced ($52 X 0.44=$22.88).  This example is assuming the landowner is paying the cost of soil nutrient replacement with fertilizer or other soil amendments.  In today’s market this split of 44% of the value of the crop being the landowners and 56% of the value of the crop being added by the harvester can also be applied to alfalfa/grass hay agreements as well, but of course using different hay values and costs of production.

These are only hypothetical examples of yields, market values and production cost estimates. All parties are encouraged to calculate their own costs and then to agree upon a current market value and the eventual pay price. To assist in more accurately estimating a pricing agreement, go to Pricing Standing Forage Worksheet by the University of Wisconsin-Extension Forage Team web site.

In today’s hay markets the fair purchase price of a standing hay crop has in many cases fallen. Some old agreements of pricing the crop on values that were set in the past may not be accurate. For more information contact MSU Extension forage team members Dr. Kim Cassida at 517-355-0271 or at .(JavaScript must be enabled to view this email address); Phil Kaatz at 810-667-0341 or at .(JavaScript must be enabled to view this email address); or Jerry Lindquist at 231-832-6139 or at .(JavaScript must be enabled to view this email address).

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