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Hay production economics

R. Curt Lacy Published on 05 June 2009

The last few years have been difficult ones for hay producers.

Regardless if someone is producing hay to feed to their own stock or producing it for sale to the public, the economics of hay production have changed drastically in the last several years. As a result, many producers are now taking a long-overdue look at the economics of hay production.

Calculating the cost of hay production
For hay producers selling to the public, cost determination is the first step to a successful marketing strategy. For stockmen growing hay for their animals’ consumption, it is important to know the cost of producing their own versus what they could be purchasing it for.

Although many producers may keep track of expenses on a per-acre basis, the more relevant number in hay production is the cost per marketing unit. For some this is tons, for others it is bales. Regardless of which fits your operation, you must eventually get your cost down to the units that you either sell or buy.

Hay production, like any other enterprise, is comprised of two types of costs – variable and fixed. Variable costs (VC), sometimes called direct costs, are those that “vary” with the level of production. That is, the amount of hay produced is directly affected by the amount of this input. Examples of VC include fertilizer, chemicals, fuel and oil, repairs, labor and operating interest.

Generally speaking, variable costs are very similar among most producers as the costs for fertilizer, chemicals, etc. and are about the same for everyone. However, there can be differences in costs due to uses of differing technologies, finding a “bargain” on inputs, etc. Also, the cost per ton can be affected by the amount of rainfall (or lack of), as well as the natural productivity of the soil.

For hay growers selling to the public, the VC per ton is a very important number. This is because the price one receives has to at least cover their variable costs – otherwise the more production they have, the more money they lose.

Fixed costs (FC), sometimes called indirect costs, are those costs that occur regardless of how much hay you produce. Examples of FC are depreciation, insurance, taxes, interest on investment and general overhead. In reality, differences in fixed cost explain most of the variation in the costs among producers. This is due mainly to different investment levels of equipment.

Producers’ investment in equipment vary widely for several reasons. First, some producers prefer trade depreciation or annual principal and interest payments to labor or repair costs. For instance, it may be worth it to them to pay a little more every year to a have a dependable piece of equipment as opposed to something they are having to continually work on. Also, with labor now at a premium, sometimes larger equipment offers more reliability than trying to find more labor.

Perhaps the biggest differences in fixed cost per ton can be attributed to the volume of hay produced in relationship to the investment. For instance, the total depreciation and other fixed costs are essentially the same for a round baler that bales 50 acres per year versus 250 acres. However, when you divide the total depreciation by the larger production, you get a lower cost per ton.

Example
To put this discussion into perspective, I have prepared an example that shows how to calculate the variable and fixed costs of producing hay in a given situation. Even though this example may not fit your operation, the principle is the same.

We will assume we are producing non-irrigated hybrid Bermuda hay with average production of 6 tons per year on 120 acres. Production practices are based on UGA recommendations and all fertilizers and crop inputs are valued at current market prices.

Results
The variable and fixed costs of producing hay are given below in Table 1*.

The total variable costs are $51,172 for 120 acres. At 6 tons per acre, that makes VC per ton $65.66. In this example, the producer needs to be charging $67 per ton or $33.50 per 1,000-pound roll just to cover his variable costs.

Fixed costs are estimated to be $22,176 or $28.45 per ton. Establishment costs are included because stands will eventually have to be replaced. Also, there are usually some general overhead expenses that occur. There is also a management charge that should usually be included. However, the major fixed cost is for depreciation, taxes and insurance, and interest on investment.

To show how these calculations are performed, the machinery complement for our example farm is presented in Table 2*. In this scenario, I am using a mixture of new and used equipment for machinery. Realistically most producers will likely have more used equipment than is depicted here, but it is not uncommon to see larger operators running a fairly new machinery complement.

The biggest problem many producers have is figuring out how to allocate fixed costs for equipment used in more than one enterprise. For instance, tractors and front-end loaders are often used in the cattle, hay (they are separate) and crop enterprises. So, how do you calculate the cost to the hay enterprise? A list is given below that should make the process a little easier.

1. Start with a listing and value of all machinery and implements used in the hay enterprise.

2. List the percentage of machine hours or amount of time this item is used in the enterprise.

3. Apply the percentages to the initial cost and salvage values.

4. Use numbers to determine depreciation, interest on average investment, insurance and taxes for each item attributable to this enterprise.

5. Sum the total fixed costs for all items.

6. This is your total machinery fixed cost for the hay enterprise.

It is very important to note two things here. First, the depreciation we are using is economic or real depreciation, as opposed to tax depreciation. The difference is that economic depreciation is often quite less than tax depreciation. When making an economic decision you should use economic depreciation to determine the actual loss in value from ownership. Secondly, the salvage values and useful life should reflect what you could sell the item for after you have used it. For instance, if you bought a used tractor for $15,000 and plan on keeping it seven years (at which time it will be worth $5,000), the annual depreciation is $1,429 ($10,000/7).

In our Table 2* example, the total machinery fixed cost is $16,151. So, if we have 120 acres of hay producing 6 tons of hay, our total fixed cost per ton is $28.45 per ton ($22,176/(6*120)). Add that to our VC per ton of $65 and the other fixed costs and you see that our total cost of producing hay is more than $94 per ton.

Some producers will probably not have this much investment for their operation while others will have more, especially if they begin purchasing semi-tractors and trucks to haul hay. Regardless, the principle is the same.

To look at the impacts of investment and production, I preparedFigure 1* that shows the fixed cost of machinery per ton for different acreages. Notice that variable costs remain the same because they are usually unaffected by the number of acres. However, as acreage increases, the fixed costs per ton decrease, showing the economy of size that many producers rely on. Notice, though, that once acreage exceeds about 100 acres, the impacts of additional acreage are rather muted.

The implications of this graph are perhaps more important for smaller producers (often cattlemen) who feel compelled to produce hay. The take-home message should be that if this machinery complement and investment closely approximates their operation, it will be very difficult for growers with less than 100 acres to compete on costs. As a result, they will need to charge a higher price. As always, you should do the calculations for your farm or ranch.

Summary and implications
It is very important that producers know how much it costs them to grow a ton of hay. If it costs them considerably more to grow the hay than they can purchase it for, they should strongly consider buying their hay instead of raising it.

Variable costs of producing hay are usually very similar among producers. However, fixed cost estimates are a lot less predictable. Calculating fixed costs for hay production is difficult for many producers because they do not know how to allocate the expenses of multi-enterprise machinery items. Items should be prorated based on the hours of annual use among enterprises.  FG

*References, tables and figures omitted but are available upon request to

R. Curt Lacy
Extension Economist-Livestock
University of Georgia

 

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