Hay production will be down in 2011, and demand for high-quality alfalfa will be strong because dairy producers will want to feed more of it as a substitute for high-priced grains.

“Those are the two things that are going to drive hay prices higher over this next year,” says Matt Diersen, South Dakota State University ag economist.

He sees prices strengthening through winter as the supply of 2010-crop hay tightens and remaining high throughout the year, with production falling short of demand. Acreage of alfalfa and alfalfa mixtures continues its downward trend, with new seedings dropping to 2.54 million acres in 2010 compared with 2.66 million in 2009, according to USDA.

In addition, he expects some hay acres to be replaced by corn, soybeans, wheat and cotton this year. Despite the outlook for higher hay prices, the acreage remains “vulnerable” to those higher-value crops, he says.

“The one thing working in hay’s favor is that new-crop corn and soybean prices haven’t risen as much as old crop, and it’s going to take high new-crop prices to pull acres out of hay. The indicator to watch is what new-crop corn is doing as the big driver.”

He doubts that the deregulation of Roundup Ready alfalfa will have much impact on acreage. The biotech crop will “make management easier relative to the alternative. It will change their management style, but I don’t think it will change the relative profitability, at least not enough to encourage additional acres of alfalfa.”

Diersen is “very optimistic about the price prospects for all classes of hay.” But he doubts that prices will reach the peak levels of 2008.

“I don’t think they will get that high, unless there’s a substantial shortage in acres or something like a production problem this summer, and that would be extreme dry conditions.”

Milk prices are lower than in 2008, so dairies can’t afford the hay-price run-up they had then. Another factor helping to keep a lid on prices early in the year is that available hay supplies are more evenly distributed throughout the country than they were three years ago.

USDA reported in January that Dec. 1, 2010, hay stocks were the lowest in five years, with only 11 states showing higher stocks. While several major hay-growing states showed significant reductions compared to year-earlier levels, in most cases neighboring states have sufficient stocks.

“We don’t have a huge area where stocks are way down,” says Diersen. “So it doesn’t have to be hauled as far, and the relative cost of transportation is down a little as well. I think that takes some of the price pressure off.”

Although several alternative crops look more profitable this year, he foresees solid profit prospects for commercial hay growers through 2011 and beyond. For those who stick with hay, it’s another opportunity to maintain long-term relationships with customers.

“You have to decide if you’re in the hay business for the long run or are you going to chase one year’s dollars?” says Diersen. “The guys in it for the long haul are going to say, ‘I’ll make the commitment again and keep raising hay.’ And I don’t think they’ll go backwards on hay this year. The price has shown that it’s going to come back.”