Buying standing hay crops in 2014

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Hay crops remain a hot commodity across the Midwest. Each year some landowners are approached by local farmers wanting to buy and harvest a standing crop of hay. The challenge then becomes how to price the standing hay crop with annual fluctuations of hay markets and changing input costs such as fuel, labor, the value of equipment and repairs to name a few. As land and crop prices have increased in value over the last five years, hay prices have also increased and thus the value of a standing crop of hay may be significantly higher than what was paid in the past.

Below are examples from Michigan State University Extension for both alfalfa (dairy quality hay) and alfalfa/grass (livestock quality hay) using a formula that considers the buyers harvesting costs and the landowners costs to grow the crop, and then negotiating a final price for the crop between these two. This is done by estimating the yield and value of the expected hay crop less the growing costs of the landowner which provides a minimum asking price compared to the maximum pay price of the buyer which also projects the total hay value less the buyer’s harvesting costs and a cost for assuming the risk of weather damaged caused by rainfall on the mowed crop.

Alfalfa field (dairy quality hay)

Equation: estimated 4 tons per acre yield of 16 percent moisture hay at $200 per ton = $800 per acre value for all three cuttings; minus buyer’s cost of harvest and weather risk at $324 per acre assuming three cuttings (table 1); equals the buyer’s maximum pay price: $476 per  acre for three cuttings ($800 - $324 = $476).

Table 1. Buyer costs/acre for three cuttings of alfalfa hay

Mowing 3 cuttings, raking 1 cutting

$54

Baling 8.9 bales per acre

$106

Bale hauling

$24

Weather risk (15% of hay value)

$120

Dry matter handling loss (2% of crop value)

$16

Other costs

$4

Total Harvest Costs

$324

The landowner’s acceptable minimum price incorporates all land and production costs and does vary geographically across the state of Michigan. Land values and rental rates are approximately double in southern Michigan compared to northern Michigan. To learn what the land values and leasing rates are for your region you can go to: 2013 Michigan Land Values and Leasing Rates. In southern Michigan, the landowner costs might be $375 per acre for all three cuttings (Table 2). In northern Michigan, the landowner costs will be lower around $304 per acre. In addition to land cost, this minimum price will also cover the landowner’s annual cost of fertilizer, property taxes and the cost of the hay stand establishment prorated over the life of the stand (Table 2). 

Table 2. Landowner costs/acre for the season

 

Alfalfa

Alfalfa/grass

Fertilizer topdress

$120

 

$90

 

Seeding costs ($330 per acre)

$83

(4 yrs)

$33

(10 yrs)

Taxes  and insurance

$30

 

$20

 

Land costs

$142

$71*

$142

$71*

Total Landowner costs

$375

($304)

$285

($214)

(minimum price

 

* Northern MI land cost

 A number somewhere between the buyer’s maximum price of $476 and the landowner’s minimum price of $375 in Southern Michigan (Table 2) may provide a fair price for both parties. This negotiated price between the max and min may be the median average of $426 per acre. If so, it can be broken down per cutting to: $191 per acre for the first cutting; $150 per acre for the second cutting; and $85 per acre for the third cutting using average cutting yield percentages of 45:35:20 respectively.

Now let’s look at an alfalfa/grass mixed hay field that has less yield and value but also fewer input costs.

Alfalfa/grass mixed field (livestock quality hay)

Equation: 3.0 tons per acre at $130 per ton = $390 per acre of hay value for two cuttings; minus buyer’s cost of harvest and risk $184 per acre for two cuttings (table 3); equals buyer’s maximum pay price of $206 per acre for two cuttings ($390 - $184 = $206)

The landowner’s minimum price to accept may be $214 per acre for the two cuttings for Northern Michigan (Table 2 alfalfa/grass). This minimum price will cover the landowner’s annual cost of fertilizer, property taxes, and pro-rated annual cost of hay stand establishment assuming a ten year life for these stands with more grass. If the buyer pays the landowner’s minimum price of $214 per acre, they must hope the yield will be larger than the estimated 3.0 ton per acre as the price is more than their suggested maximum price to pay of $206. If they come to an agreement and the negotiated price is $210 per acre, the per cutting price for first cutting would be $140 per acre and for second cutting would be $70 per acre, using average cutting yield percentages of 66:34 respectively. This example points out that with today’s higher costs of production, hay yields of 3 tons or less per acre may not always be a profitable venture for either party. Proper rotation and establishment of new hay stands is advised for low yielding stands.

Table 3. Buyer costs/acre for two cuttings of alfalfa/grass hay

Mowing 2 cuttings, raking 1 cutting

$36

Baling 6.7 bales per acre

$80

Bale hauling

$18

Weather risk (10 percent of hay value)

$39

Dry matter handling loss (2 percent of crop value)

$8

Other costs

$3

Total Harvest Costs

$184

Rather than estimating the yield of hay at the beginning of the season, it can be more accurate to agree on a percentage split and the pay price of the forage at the beginning of the season. Following harvest, the forage yield is counted, calculated and payment is made accordingly at the end.

As an example for alfalfa hay using the first example above on a bale or ton basis, if the buyer provides all the harvesting cost and assumes the risks of harvest, then a split of the harvested crop would be approximately 53 percent of the crop, or its value, going to the landowner and 47 percent going to the buyer (negotiated fair price to charge of $426 per acre divided by the total estimated value of $800 = 0.53). If the buyer makes a round bale weighing 900 pounds and the two parties agree to price all hay at $200 per ton, then each bale should be worth $90 per bale (900/2000=0.45; then 0.45 X $200=$90) and the 53/47 split would then pay the landowner $48 for each bale produced ($90 X 0.53=$48). This example is assuming the landowner is paying the cost of soil nutrient replacement with fertilizer or other soil amendments. In today’s market this 53/47 split can apply to alfalfa/grass hay agreements as well but, of course using different hay values and costs of production.

These are only hypothetical examples of yields, market values and production cost estimates. All parties are encouraged to calculate their own costs and then to agree upon a local market value and the eventual pay price. To assist in more accurately estimating a pricing agreement, go to Pricing Standing Forage Worksheet by the University of Wisconsin-Extension Forage Team.

In today’s high value hay markets the fair purchase price of a standing hay crop has increased. Some old agreements of pricing the crop on values that were set in the past may not be accurate. For more information contact MSU Extension Forage Team members Kim Cassida at 517-355-0271 or cassida@msu.edu; Phil Kaatz at 810-667-0341 or kaatz@anr.msu.edu; or me at 231-832-6139 or lindquis@anr.msu.edu



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