By most accounts, the numbers in last week’s Crop Production report from USDAare sure to put upward pressure on U.S. alfalfa prices in the months ahead. The big question is just how far prices might move, says Matt Diersen, ag economist with South Dakota State University Extension.

According to the report, U.S. production of alfalfa and alfalfa-mix hay in 2012 will likely total about 55 million tons, down 16% from last year’s total and the lowest production since 1953.

“It’s looking like we have a pretty big supply problem shaping up across the U.S.,” says Diersen.

Even so, a variety of factors are likely to temper the price impact of the supply shortfall. “It’s not a situation where you have an unlimited upside for prices,” says Diersen. “With this type of tight supply situation,we’re likely to see livestock producers feeding more substitute feeds like corn silage, cornstalks, straw and distillers grains. That will replace some of the lost hay supply.”

A drop-off in demand due to declining livestock numbers could also act as a brake on hay price increases. According to USDA’s July 1 Cattle Inventory report, cattle numbers are down 2% from what they were a year ago. “That should mean less demand for feed overall, even though feedyards in some parts of the country are feeding longer than they ordinarily would because of the drought,” says Diersen.

Many Conservation Reserve Program (CRP) acres have already been released for emergency haying and grazing in drought-stricken regions. But uncertainty about how many will eventually be released makes predicting hay prices especially tricky, he says. Some estimate that less than 20 million acres of CRP land could potentially be harvested. By statute, only 50% of released acreage could be hayed. At an estimated 1-ton/acre yield from those acres, the national hay supply could be bolstered by at most 10 million tons. “That’s not enough to alleviate a super-tight supply situation.”

Diersen’s bottom line: If no CRP land had been made available, hay prices nationally would likely average $200/ton in 2012. That compares to last year’s $175/ton price. With the released CRP acres coming into play, look for prices to be about 10%lower than that.