Pricing “hay on the hoof”
|By Mike Rankin|
It’s that time of year when some hay, livestock, and dairy producers will seek available hayfields to bolster their own forage supplies.
When you sit in an extension office as I did for 27 years, the question about how much to pay or charge for standing hay is a popular one. Unfortunately, the answer is usually one wrought with complexities; there are a number of different approaches to take, ranging from simple to mind-numbing.
Several axioms always come into play when pricing standing hay, or “hay on the hoof.” First, local market conditions can override any spreadsheet calculation. In times of drought and severe winterkill, it stands to reason that forage supplies will be short and demand will be high. As such, the normal rules are discarded, and it may be cheaper than buying forage on the open market.
Conversely, when forage inventories are high, it’s sometimes difficult to give away standing forage. This sometimes happens when later cuttings are put on the market.
Selling hay by the cutting rather than by the year or season is a double-edged sword. Selling hay by the cutting takes some of the risk factor out of the equation for the buyer because they know what they’re getting and are often willing to pay more based on that knowledge. On the other hand, selling by the cutting runs the risk of not finding a willing buyer if forage inventories are high or if the crop is in poor condition.
The fairest method to buy and sell standing hay is on a per-ton basis rather than a per-acre basis. This takes the yield risk out of the equation; however, it’s not always easy or convenient weighing the crop, especially if it is being chopped as haylage rather than baled. For this reason, many buyers still prefer to pay by the acre.
The prospective seller of standing hay must receive, at minimum, the combined value of three factors if selling standing hay for the season. First, they must get the value of prevailing bare ground cash rent, which should include any tax or insurance costs.
Second, they must get the value of the fertilizer nutrients being removed by the crop. This usually is limited to phosphorus and potassium but might also include sulfur and boron in the case of alfalfa. At current prices, this cost alone may be upward of $100 per acre for an alfalfa stand yielding 5 tons of dry matter per acre. If the buyer is going to be responsible for buying and applying the removed nutrients, then this cost is not included in the per-acre charge for the standing crop.
Finally, the seller must receive the establishment costs associated with the crop prorated over the life of the stand. For example, if those costs totaled $140 per acre and the stand life was four years, then the prorated cost would be $35 per acre. Included in the establishment costs are lime, secondary tillage, planting, seed, and herbicide.
If the seller cannot get the combined total of these three cost items — land (cash rent), nutrient removal, and establishment — then they are better off cash renting the bare land. However, selling standing forage is different than renting bare land. With standing forage, the seller is really marketing an unharvested product and will probably look to receive a payment that includes some additional profit margin.
The buyer must start by looking at alternatives to purchasing the standing hay. This is easier for baled hay or baleage versus chopped haylage. Still, baled hay can be used as a starting point to determine value.
Next, the buyer must be able to estimate a reasonable yield if the standing hay is being purchased by the acre.
Multiplying hay value (dry matter basis) by estimated yield offers the foundation by which a maximum per-acre pay price can be determined. Next, harvest costs must be deducted on a per-acre basis, or it can be determined as cost per ton and multiplied by the estimated yield. These costs can be estimated using custom rate surveys if you don’t know your actual costs. Keep in mind, however, that custom costs are somewhat higher than actual costs.
Next, consider dry matter loss. When purchasing harvested forage, these losses have already occurred. For standing forage, the losses are yet to come. For dry hay, harvest and handling losses may be 2 to 4 percent. For haylage, figure 10 to 15 percent for harvest and fermentation losses.
The factor of risk must also be addressed. When buying standing hay for the season or year, it’s impossible to know future weather conditions. As such, some discount for risk must be considered. A rule of thumb is to use 15 percent of the gross base value.
Subtracting your harvest costs, a risk cost, and the dry matter loss value from the base price determines the maximum purchase price for standing hay. In the final analysis and a perfect world, the actual pay price per acre will be somewhere between the seller’s minimum and the buyer’s maximum.
To view slight variations of this approach, a quick internet search of “pricing standing hay” will yield many returns and examples. University of Wisconsin-Extension also offers a spreadsheet and Android-based app for making calculations.