With USDA forecasting near barn-busting production for alfalfa and other types of hay this year, growers are likely to see little upside movement in hay prices for the 2010 crop. Farther out on the time line, though, prices could be headed higher, say some of the country’s leading market observers.

According to USDA’s October Crop Production report, U.S. growers will harvest 71.3 million tons of alfalfa and alfalfa-grass hay in 2010, up slightly from year-ago levels. For other hay, USDA is expecting total production of 81 million tons. If the estimate holds up, production would be 6% higher than last year’s and the third-largest production total on record.

The numbers in the USDA report can be a little misleading, says South Dakota State University Extension ag economist Matt Diersen. He points out that this year’s increased yields for other hay in Texas, up 0.9 ton/acre from 2009 production, account for a large share of the nationwide production increase.

“Just about everywhere else, there was very little production change from a year ago,” he says.

Diersen notes that the large Texas increase is the result of growers there making up for major production shortfalls related to drought during the past two years.

“Most of that hay is going to stay in Texas because it’s needed locally,” he says. “Even if that weren’t the case, transportation costs make it difficult to move hay from Texas to places like Pennsylvania or other parts of the country where they might be down on production because of hot, dry weather. In short, it’s not going to have that much impact on the price situation in the rest of the country.”

Interpreting the alfalfa production numbers for 2010 can be equally tricky. Overall U.S. tonnage is up, with most of the increase resulting from an extremely wet growing season that led to higher-than-average yields in many major alfalfa-producing areas. The wet weather, though, made it difficult for growers in many states to put up high-quality dairy alfalfa hay in any great quantity.

In “more normal” marketing times, the shortage of high-quality dairy alfalfa might give growers reason to expect a sharp increase in prices. But Diersen points out that economic conditions in the dairy industry make such a price rise unlikely anytime soon.

“If we had a really high milk price, high-quality hay could be worth quite a bit more,” he says. “But while things have been getting a little better, many dairy producers are still struggling. As a result, they’re not going to be able to make incorporating high-priced hay into their rations pencil out.”

Steve Hessman, USDA Market News reporter in Dodge City, KS, agrees with Diersen’s assessment. He notes that a decrease in alfalfa acreage, coupled with early season weather complications, has led to an estimated 6% reduction (compared to that in 2009) in Kansas alfalfa hay production this year.

The likely resulting tight supply situation has helped prices firm up in recent months. As of late September, top-quality alfalfa was selling for around $150/ton, roughly the same price as last winter’s.

“Milk prices are better than they were a year ago, and dairymen will want to buy better hay to keep those cows milking,” says Hessman. “But many are still catching up from the tough times of the last two years. To have any kind of real impact on the alfalfa hay price, the milk price will still have to go up by another $1-2.”

The situation is similar on the West Coast, reports California hay marketing expert Seth Hoyt, author of The Hoyt Report newsletter. With alfalfa acreage in California dropping by 50,000 acres this year and cool, wet weather early in the 2010 growing season crimping overall production, the supply of premium dairy hay in the state has tightened considerably since spring.

In turn, the combination of tight supplies and improving milk prices was pushing up dairy hay prices at summer’s end. Hoyt believes there could be more strengthening in the months ahead.

“I don’t think we’ll see anything like we saw in 2008 for prices,” he says. “But there is still some room for hay prices to improve. At the same time, though, there’s still a lot of concern about what’s going on with the dairy situation. Dairy producers are dealing with higher grain prices and many lenders still have dairies on a pretty tight leash.”

Along with tracking dairy-sector developments, alfalfa growers trying to figure what might happen with prices beyond the 2010 crop will want to keep a close eye on wheat and feed-grain prices in the months ahead. With wheat prices spiking and a late-summer rally pushing corn prices upward, many farmers could be enticed to plow under alfalfa crops next year.

“It wouldn’t surprise me if we lost a few more (alfalfa) acres,” says South Dakota’s Diersen. “If that turns out to be the case, low prices for hay this year could be followed by a sharp price increase next year.”