Pricing standing forage

 

Sales of standing forage require an estimate of market price and a method of determining yield--whether forage is sold by the bale, ton, or acre--as a starting point for negotiations between the buyer and seller. This article describes a method to help determine a starting point for short-term sales; it is not intended to be used for long-term contracts.

 

 

Forage prices reflect inventories, demand, acreage, current season yield potential, and yield risk and reflect differentials for attributes or quality. Current hay prices are much less readily available than prices for corn, soybeans, and wheat. A source of information for Michigan hay price estimates is the “The Michigan Hay Listing Network" developed with the cooperation of the Michigan Forage Council, Michigan Farm Bureau, and Michigan State University Extension. It is at the webpage http://web2.canr.msu.edu/hay/.

 

The University of Wisconsin Polk County Extension Service provides a weekly summary from AMS/USDA sources for the Upper Midwest that is available on internet. There is often significant regional variation in price because of the cost of transport and local conditions but the site provides a useful reference point. The webpage is https://polk.extension.wisc.edu/agriculture/crops-and-soils/current-hay-prices/

 

The haylage price is usually estimated by adjusting the hay price for the difference in moisture content between hay and haylage and differences in handling and storage cost that may exist between time of purchase and use.

 

 

The farm with the standing forage looks at the cost savings that would be incurred if the forage were sold as a standing crop versus sold as hay. Costs of harvesting and, perhaps, storage would not be incurred. Also, depending upon the structure of the contract in terms of risk sharing, the farm may avoid yield and quality risk. Thus, on a per acre basis they are looking at gross revenue less costs not incurred with, perhaps, some adjustment for risk.

 

 

The buyer of standing forage usually is looking at the value of time, place, form and quality of the forage. They typically have the capacity to harvest, haul and store the forage. Buying the forage standing in the field may provide more quality control, assurance of access, form desired, and/or locational advantages over direct purchase. They have a similar perspective to the seller; namely, what costs am I saving by purchasing standing forage versus the “finished” product. Thus, they are also looking at the price of the finished product, hay, as a reference point and asking what production costs they save (such as establishment, fertilizer, pest control, etc.) by purchasing the crop standing in the field and additional risk they may be incurring.

 

 

Since both the buyer and the seller use price per ton in the market as a reference point, determining yield is critical in pricing standing forage. Historic records for the field provide one starting point if they are available. Stand evaluations provide an alternative for estimating yield potential but need to take into account the age of the stand, fertilizer program and weather. Sale based on actual yield can be used and impacts the risk borne by both buyer and seller. Actual yield can be determined by weighing loads or estimated by weighing a few bales and counting total bales harvested. 

 

Forage agronomists generally recommend that actual weights coming off the field be used where at all possible. Estimating standing yield is an inexact science and can have significant impacts to the risk for both buyer and seller.  If the sale is based on estimated preharvest yield, there is considerable risk of a big harvest loss between cuttng and baling (i.e. if it gets rained on or mishandled to cause leaf shatter, etc.).

 

 

 

 

 

For example, if yield in a three cutting system is expected to be 4.5 tons/acre, first cutting yield would be 4.5 tons × 0.40 = 1.8 tons/acre.

 

 

If chopped for haylage, the moisture content of the haylage would have to be determined to convert haylage yields to hay equivalent by the formula:

 

 

For example, if first crop haylage yield is 3.9 tons/acre of haylage at 40 percent dry matter, and dry hay is expected to be 87 percent dry matter, this haylage could be converted to hay equivalent as follows:

 

 

 

Table 2 provides an estimate of selected harvest costs for Michigan. If forage needs to be transported some distance, hauling costs should also be factored into harvesting costs.

 

 

 

 

 

The following steps provide a starting point for negotiations from the seller’s perspective:

The steps are similar for the purchaser. They are estimating the additional costs they incur if they purchase standing forage versus as dry hay. Thus, their costs for standing forage shouldn’t exceed the purchase price in the field plus the additional costs. However, the buyer’s cost structure, pricing of hay package type, and ability to better control quality, and pricing of risk may differ from the seller.

 

 

Timeliness of cutting and the percentage of alfalfa versus weeds in the stand will impact forage quality. Keep in mind that taking a forage sample for quality testing could help with marketing as it provides an analysis of the actual content of the forage.  A dense, clean stand of pure alfalfa or mixed with a high-quality grass should be of higher value than an older stand with weeds or grass and would deserve a premium in a competitive forage market.

 

Lower than expected yields or weather delays lowering quality can greatly reduce the net gain of purchasing standing forages. Producers need to adjust numbers in these examples to reflect current market conditions, yield and harvest timeliness. The value of risk is difficult to estimate, but can be based on a typical value of the desired forage quality.

 

Contracts signed well before harvest and full season contracts should reflect a lower price due to greater risk the buyer is assuming. In contrast, an agreement made close to harvest would be much closer to the current forage price because the buyer knows the status of the crop being purchased.

 

The Wisconsin Forage Team suggests a risk premium of 10% to 20% of gross revenue with the range dependent upon the timing of when the contract is established relative to information about yield and quality.  A 10% risk factor, for our example, would be a reduction in the price of about $30/acre or $16.50/ton. Note: negotiation needs consistency whether the setting of marketable yield and average price already reflect the vulnerabilities of producing forages or whether an additional adjustment is needed.

 

 

The buyers of standing forages are often livestock producers who may be willing to spread manure on fields where the forages are harvested.  The economic value of manure as a replacement fertilizer should be taken into consideration.  Often, the purchaser’s price is adjusted for the reduction in the seller’s fertilizer expenses (i.e. based on nutrient removal). 

 

Opportunities may also exist for the buyer to custom harvest the seller’s other crops, providing convenience and value to their operation.  The value should be considered in determining a price of standing forage, particularly for farms with smaller equipment or absentee landlords.

 

 

A written agreement prior to start of harvest is recommended and should include price, when payment is due, method of determining yield when selling by the ton, and other pertinent factors. A written contract clarifies the sale agreement for all parties and provides a record to eliminate differing memories of what was agreed to.