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Improve the profitability of your forage business

William F. Lazarus Published on 05 February 2010

Profitable businesses generally have an “edge” of some sort over the competition.Some tend to focus on low cost. Other businesses are known for marketing exceptionally high-quality products that keep people coming back even if they cost a little more.

Some businesses are successful simply because of their relationships with customers who keep coming back because they know what to expect.

 So, a question that forage growers should ask themselves is, “Do I want to be a low-cost operator? Do I want to be known mainly for high quality, with cost a secondary consideration? Or is it my relationships with customers and my responsiveness that is my ‘edge’”? Your answer to those questions will help tell you where to look for improved profitability.

For a forage business that wants to be low-cost, it is important to know what your costs are. Our Minnesota FINBIN farm records show that 40 to 50 percent of the cost of producing forage crops is machinery- and labor-related, so controlling those costs is particularly important. The most accurate method of determining machine costs is using complete records of the actual costs incurred in a specific situation.

Actual cost data are often incomplete or not available; however, a number of university extension services have free computer decision aids to help with estimating costs. The calculations generally show that the main way to keep costs low is to spread the time-related ownership costs over as much volume as possible, as long as quality is not unduly sacrificed in the process.

To maximize volumes, get the acres scheduled as far in advance as possible, but be prepared for the inevitable weather delays. Labor availability is a perennial problem, but good personnel management practices can help here.

Preseason maintenance is important to make sure the equipment is ready to go, and a reliable parts supply is essential when breakdowns do occur. When to replace an aging machine is one of those questions that I’ve never found an answer to that fits every situation. We can draw up comparisons of repair costs versus depreciation costs by year to help you make that replacement judgment call.

Thinking in terms of tradeoffs, pushing a pencil and considering slightly “outside-the-box” equipment combinations of mowing equipment, windrow mergers and choppers may help you identify cost-cutting or revenue-enhancing opportunities. The farm records suggest that more cropping operations are being outsourced to custom operators.

On alfalfa hay enterprises, custom hiring expenses averaged 8.4 percent of total expenses in 2008, and are increasing at 0.5 percent per year. Custom hiring on corn silage was 8.0 percent with an increase of 0.26 percent per year. For example, large dairy operations in Minnesota and Wisconsin are outsourcing more of the silage chopping and manure-hauling work to custom operators, based on anecdotal reports.

The farm records have less to say about how to market your forage business based on the quality of your product. A forage business that aims for a reputation of supplying high-quality product will look closely at cutting date, of course. It is well-known that the nutritional quality of first-cutting hay tends to decline as the harvest date is delayed.

The physical quantity of the crop increases over some range of dates, so the quantity increase and the quality decline present the grower with a tradeoff. For example, suppose that the earliest feasible harvest date is May 20, at which point the crop is expected to yield one ton per acre. The yield is expected to increase by 100 pounds per acre over the next three weeks.

On June 9, the yield is up to two tons per acre. If the relative feed value (RFV) is 170 on May 20 but declines by five points each day thereafter, it will be down to 70 by June 9. With this information, the profit-maximizing cutting date can be estimated once we arrive at how much the selling price will change for each one-point change in the RFV, and how much the harvesting cost will increase with an additional ton of yield.

For example, a few years’ hay prices at the Sauk Centre, Minnesota quality-tested hay auction increased by around $0.58 per ton for each one-point change in RFV.

The profit-maximizing harvest date then works out to be May 27 if the harvest cost per acre increases by $5 per ton of additional yield. University of Wisconsin-Madison Extension Agronomist Dan Undersander and I have developed an Excel spreadsheet to help arrive at the most profitable harvest date given this tradeoff between yield and quality. Go to www.apec.umn.edu/faculty/wlazarus/documents/haycutdate.xls to download it.

One key to good relationships with forage customers is writing good contracts that spell out what the buyer and seller expect from each other. Contracts are a complicated issue, however. Any contractual arrangement is likely to endure over time only if the prices set forth in the contract allow both parties to profit over time.

Disputes can arise when low yields make it difficult for the crop producer to deliver the amount contracted for, or if prices drop and give the dairy producer a case of “buyer’s remorse.” The crop producer can minimize yield risk by carrying crop insurance and being conservative with amounts contracted. Moisture and other quality measures can become problems and can be specified in the contract. A University of Wisconsin fact sheet by Joe Stellato, “Contract Feed Production Arrangements” available at www.uwex.edu/ces/crops/uwforage/contracts.pdf includes a more extensive list of things to consider and some sample contract language. A Minnesota fact sheet with suggested language for written contracts and promissory notes is: “Contracts, Notes and Guaranties” by Phillip L. Kunkel and Scott T. Larison, attorneys with Hall & Byers, P.A. of St. Cloud, Minnesota, at www.extension.umn.edu/distribution/businessmanagement/DF2590.html on the University of Minnesota Extension Service website.

In the case of corn silage, one way to approach the question of the “right” price is to calculate a maximum price the buyer can afford to pay versus alternative feeds, and a minimum price the seller can afford to accept versus harvesting it for grain. How far ahead of harvest the sale is agreed upon, how the silage volume is measured, when and in what form payment is due, and requirements to be legally enforceable are other considerations. FG

References omitted but are available upon request at

William F. Lazarus for Progressive Forage Grower

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