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Pricing standing forage

Roy Black Published on 22 July 2010

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.

What is a reasonable hay or haylage price?
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. There is often significant regional variation in price because of the cost of transport and local conditions.

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 seller’s perspective
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’s perspective
The buyer of standing forage usually is looking at the value of time, place and form 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 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 costs they save by purchasing the crop standing in the field and additional risk they may be incurring.

How do I estimate yield?
Since both the buyer and the seller use price per ton in the market as a reference point, estimation of 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.

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Table 1 can be used to estimate relative yield for individual cuttings.

For example, if yield in a three- cutting system is expected to be 4.5 tons per acre (at 40 percent dry matter), first-cutting yield would be 4.5 tons × 0.40 = 1.8 tons per 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:

Hay yield = (haylage yield x percent DM of haylage)/percent DM of hay

For example, if first-crop haylage yield is 3.9 tons per 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:

Hay yield = (3.9 ton/acre x 40)/87 =

1.8 ton/acre

What is the quality of the standing forage?
Timeliness of cutting and the percentage of alfalfa versus weeds in the stand will impact forage quality. 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 and would deserve a premium in a competitive forage market.

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What are harvest costs of standing forage?
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.

Steps in calculating

the price of standing forage

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

• Estimate the price per ton for the average-quality hay that would be expected to be produced from the field (cutting).

• Estimate the yield per acre.

• Calculate the gross revenue: price × yield

• Estimate costs not incurred if forage is sold standing in the field instead of as hay.

• Price per acre = gross revenue per acre - cost per acre saved by selling as standing forage in field

• Price per ton = price per acre/yield per acre

There may be an adjustment in this price for risk depending upon the terms of the contract. For example, if the field is priced on a per-acre basis prior to harvest, the buyer is absorbing the yield and quality risk associated with weather.

The steps are similar for the purchaser. They are estimating the additional costs they incur if they purchase standing forage versus 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 form and ability to better control quality and pricing of risk may differ from the seller.

Example:

• First-cutting hay will yield an expected 1.8 tons per acre of dairy-quality forage (weather permitting). Assume 700-pound round bales and $8 per ton hauling charge.

• Hay at $110 per ton (average across potential quality reflecting harvest risk)

• Costs not incurred are $71.80 per acre or ($71.80/1.8) = $39.90 per ton

• Price per acre = (1.8 ton × $110 per ton - $71.80) = $126.20 per acre

• Price per ton = ($126.20/1.8) = $70.11 per ton

Further adjustments might be warranted for risk, partly depending upon whether potential variability in quality was reflected in price.

The seller and buyer would make similar calculations reflecting their perspectives and information. This would provide a starting point for discussion and negotiation.

Additional considerations
Frequently, buyers of standing forage are livestock producers, and in many instances they may spread manure on fields on the farm where they are harvesting the forage. The economic value of the manure as a fertilizer replacement should be taken into consideration. Typically the purchaser’s price is adjusted for the reduction in the seller’s fertilizer expenditures.

In some instances, particularly for farms with smaller tractors or absentee landlords, custom harvest may provide a convenience factor that provides value and is a consideration.

Risk
Lower-than-expected yields or weather delays lowering forage quality can greatly reduce the net gain of purchasing standing hay. 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 hay 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 hay price because the buyer knows the status of the crop being purchased.

The Wisconsin Forage Team suggests a risk premium of 10 to 20 percent 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 percent risk factor, for our example, would be a reduction in the price of about $30 per acre or $16.50 per ton. Note, the bargainers need to be sure they are consistent in whether their setting of marketable yield and average price already reflect the vulnerabilities of producing forages or whether an additional adjustment is needed.

Final consideration
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.  FG

Excerpts from Michigan State University Field CAT Alert, Vol. 23, No. 7

TABLE 2 Source: Dennis Stein, Extension Educator, MSU, “Spring 2008 Machine Work Rates for Saginaw Valley of Michigan”. A more complete list of tasks is available at www.msu.edu/user/steind)

Roy Black
Agriculture Economics
Michigan State University

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