Determining a fair price for standing alfalfa hay can be a complex process. Year-to-year changes in hay prices and yields, and different values for various cuttings, all play roles.
The key to coming up with a successful buyer-seller price agreement is recognizing that both parties come to the transaction with different expectations, says Mike Rankin, University of Wisconsin extension crops and soils specialist in Fond du Lac County, WI.
“The landowner is looking to gain value from not having to harvest the crop,” he says. “The buyer is looking to gain value by paying less for standing hay than for a harvested crop. The goal in price negotiations is to find a middle ground.”
Rankin suggests using local bare-land rental rates as a starting point.
“Most producers have a pretty good idea of what crop ground is renting for in their areas,” he says. “The important thing to keep in mind is that there is a difference between renting bare land and renting an alfalfa field. In the latter case, buyers are actually buying a product they have to harvest.”
On the buyer's part, costs associated with harvesting the crop — labor, fuel, machinery maintenance and depreciation — are major considerations in setting a price.
“A lot will depend on the individual operation and the kind of equipment a person has. As a rule of thumb, you can probably figure on a charge of somewhere around $35-40/ton. If you plan to haul the harvested product a long distance from the field, you'll want to adjust that number upward.”
Using those numbers will start to give you a better idea of what you can afford to pay for the standing crop. For example, at $160/acre, you're paying $40/ton of dry matter (before harvest and storage losses) for a total season yield of 4 tons/acre. Combining that with $40 in harvest cost would give you an $80/ton investment.
Calculating potential yields can be a tricky part of price negotiations.
“In an ideal world, a producer would have some reasonable method of weighing production coming off the field,” says Rankin. “But in the vast majority of situations, your best bet is to come up with a one-year average yield estimate, taking into account the age of the stand and presence of grass or weeds.”
On the flip side, the landowner may expect to be compensated for certain establishment costs.
“One way to figure it would be to prorate those costs over a three- to four-year period to come up with an average annual cost,” he says.
Nutrient removal costs and who pays them are other factors to consider. Rankin advises starting with a calculation for potash costs and removal rates. If you estimate a total potassium removal of 200 lbs/acre over a season (based on a 4-ton/acre yield) and potassium costs of 70¢/lb, the total value of potassium removed is more than $140/acre.
“That's going to add significantly to the value of the purchased hay. And that's just for potash. In some cases, you'll want to figure phosphorus costs in, as well.”
A key question, asks Rankin, is who pays for the nutrient removal?
“People work out agreements a lot of different ways,” he says. Those range from no one paying to some sort of split arrangement.
“I don't think it's unreasonable for the landowner to expect some return on establishment costs. Otherwise, why wouldn't he just rent the land out as bare ground? On the other hand, if nutrient removal charges push up costs too far, buyers might determine they're better off buying harvested hay.”
Dwight Aakre, North Dakota State University extension farm management specialist, isn't sure establishment costs need to be considered in price negotiations.
“From an economics standpoint, you can make the case that the costs of seed and fertilizer are basically sunk costs,” he says. “In other words, the landowner will have those costs whether or not someone rents the land for hay production.”
Aakre adds that local hay prices should also be factored in when negotiating price.
“The price of hay is very dependent on location,” he says. “If there is a high demand locally, the price may be considerably higher. Due to hay's bulky nature, its value falls rapidly with increased distance to market.”
Rankin also recommends having a written agreement in place before harvest starts. Among other things, the agreement should specify price, method of determining yield (if selling is by the ton) and who is responsible for what cost.
“The written agreement clarifies the provisions of the sale for everyone involved and helps head off misunderstandings that could develop if there are differing recollections on what was agreed to somewhere down the road,” he says.