Pricing standing forage
Editor’s note: This article is from the archives of the MSU Crop Advisory Team Alerts. Check the label of any pesticide referenced to ensure your use is included.
Note: Many of the concepts and some of the language in this fact sheet are adapted from “How to Price Standing Forage” by Ted Bay, Rhonda Gildersleeve, Ken Barnett, and Dan Undersander, University of Wisconsin Crop Manager Fact Sheets, May 15,2008. However, there are some significant differences in approach.
Sales of standing forage require an estimate of market price and a method of determining yield—whether forage is sold by the bale, ton, or acre—as a starting point for negotiations between the buyer and seller. This fact sheet describes a method to help determine a starting point for short-term sales; it is not intended to be used for long-term contracts.
What is a reasonable hay or haylage price?
Forage prices reflect inventories, demand, acreage, current season yield potential, and yield risk and reflect differentials for attributes or quality. Current hay prices are much less readily available than prices for corn, soybeans, and wheat. A source of information for Michigan hay price estimates is the “The Michigan Hay Listing Network” developed with the cooperation of the Michigan Forage Council, Michigan Farm Bureau, and Michigan State University Extension. It is at the webpage http://web2.canr.msu.edu/hay/.
The University of Wisconsin Polk County Extension Service provides a weekly summary from AMS/USDA sources for the Upper Midwest that is available on internet. There is often significant regional variation in price because of the cost of transport and local conditions but the site provides a useful reference point. The webpage is http://www.uwex.edu/ces/forage/pubs/hay_market_report.htm
The haylage price is usually estimated by adjusting the hay price for the difference in moisture content between hay and haylage and differences in handling and storage cost that may exist between time of purchase and use.
The seller of standing forage’s perspective
The farm with the standing forage looks at the cost savings that would be incurred if the forage were sold as a standing crop versus sold as hay. Costs of harvesting and, perhaps, storage would not be incurred. Also, depending upon the structure of the contract in terms of risk sharing, the farm may avoid yield and quality risk. Thus, on a per acre basis they are looking at gross revenue less costs not incurred with, perhaps, some adjustment for risk.
The buyer of standing forage’s perspective
The buyer of standing forage usually is looking at the value of time, place, and form of the forage. They typically have the capacity to harvest, haul and store the forage. Buying the forage standing in the field may provide more quality control, assurance of access, form desired, and/or locational advantages over direct purchase. They have a similar perspective to the seller; namely, what costs am I saving by purchasing standing forage versus the “finished” product. Thus, they are also looking at the price of the finished product, hay, as a reference point and asking what costs they save by purchasing the crop standing in the field and additional risk they may be incurring.
How do I estimate yield?
Since both the buyer and the seller use price per ton in the market as a reference point, estimation of yield is critical in pricing standing forage. Historic records for the field provide one starting point if they are available. Stand evaluations provide an alternative for estimating yield potential but need to take into account the age of the stand, fertilizer program and weather. Sale based on actual yield can be used and impacts the risk borne by both buyer and seller. Actual yield can be determined by weighing loads or estimated by weighing a few bales and counting total bales harvested.
Table 1 can be used to estimate relative yield for individual cuttings.
|Table 1. Approximate yield distribution for 3- and 4-cutting alfalfa systems¹|
|Cutting||% of Total
|Cutting||% of Total
¹Source: Dr. Dan Undersander, Department of Agronomy at University of Wisconsin – Madison.
For example, if yield in a three cutting system is expected to be 4.5 tons/acre, first cutting yield would be 4.5 tons × 0.40 = 1.8 tons/acre.
If chopped for haylage, the moisture content of the haylage would have to be determined to convert haylage yields to hay equivalent by the formula:
For example, if first crop haylage yield is 3.9 tons/acre of haylage at 40 percent dry matter, and dry hay is expected to be 87 percent dry matter, this haylage could be converted to hay equivalent as follows:
What is the quality of the standing forage?
Timeliness of cutting and the percentage of alfalfa versus weeds in the stand will impact forage quality. A dense, clean stand of pure alfalfa or mixed with a high quality grass should be of higher value than an older stand with weeds and would deserve a premium in a competitive forage market.
What are harvest costs of standing forage?
Table 2 provides an estimate of selected harvest costs for Michigan. If forage needs to be transported some distance, hauling costs should also be factored into harvesting costs.
|Table 2. Approximate harvesting costs for selected tasks ($/cutting)² (labor $10.50/hr for unskilled tasks.$13.00/hr for skilled task, 3 cuttings, 4 to.5 ton hay/acre)|
Chopping forage, pull type pick-up head
Round baling(1,000 lb with wrap)
Round baling (600 - 800 lb)
Small square bale
²Source: Dennis Stein, Extension Educator, MSU, “Spring 2008 Machine Work Rates for Saginaw Valley of Michigan”. A more complete list of tasks is available at http://www.msu.edu/user/steind/
Steps in calculating the price of standing forage?
The following steps provide a starting point for negotiations from the seller’s perspective:
- Estimate the price/ton for the average quality hay that would be expected to be produced from the field (cutting).
- Estimate the yield/acre.
- Calculate the gross revenue: price × yield.
- Estimate costs not incurred if forage is sold standing in the field instead of as hay. Price/ acre = Gross revenue/acre – Cost/acre saved by selling as standing forage in field
- There may be an adjustment in this price for risk depending upon the terms of the contract. For example, if the field is priced on a per acre basis prior to harvest, the buyer is absorbing the yield and quality risk associated with weather.
The steps are similar for the purchaser. They are estimating the additional costs they incur if they purchase standing forage versus as dry hay. Thus, their costs for standing forage shouldn’t exceed the purchase price in the field plus the additional costs. However, the buyer’s cost structure, pricing of form and ability to better control quality, and pricing of risk may differ from the seller.
- First cutting with an expected yield of 1.8 ton hay / acre of dairy quality (weather cooperating). Assume 700 lb round bales and $8.00/ton hauling charge. Hay @ $165/ton (average across potential quality reflecting harvest risk).
- Costs not incurred are $71.80/acre or $71.80 / 1.8 = $39.90 / ton.
- Price / acre = 1.8 ton × $165/ton - $71.80 = $225.20/acre.
- Price / ton = $225.20 / 1.8 = $125.10 / ton.
- Further adjustments might be warranted for risk, partly depending upon whether potential variability in quality was reflected in price.
The seller and buyer would make similar calculations reflecting their perspectives and information. This would provide a starting point for discussion and negotiation.
Lower than expected yields or weather delays lowering forage quality can greatly reduce the net gain of purchasing standing hay. Producers need to adjust numbers in these examples to reflect current market conditions, yield and harvest timeliness. The value of risk is difficult to estimate, but can be based on a typical value of the desired hay quality.
Contracts signed well before harvest and full season contracts should reflect a lower price due to greater risk the buyer is assuming. In contrast, an agreement made close to harvest would be much closer to the current hay price because the buyer knows the status of the crop being purchased.
The Wisconsin Forage Team suggests a risk premium of 10% to 20% of gross revenue with the range dependent upon the timing of when the contract is established relative to information about yield and quality. A 10% risk factor, for our example, would be a reduction in the price of about $30/acre or $16.50/ton. Note, the bargainers need to be sure they are consistent in whether their setting of marketable yield and average price already reflect the vulnerabilities of producing forages or whether an additional adjustment is needed.
A written agreement prior to start of harvest is recommended and should include price, when payment is due, method of determining yield when selling by the ton, and other pertinent factors. A written contract clarifies the sale agreement for all parties and provides a record to eliminate differing memories of what was agreed to.