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0608 FG: 2008 to 2009 – Where are forages headed?

Darren Olsen Published on 09 December 2008

If 2008 wasn’t an interesting year for the forage industry I don’t know what would be.

We have seen commodity prices rise and fall, oil hit record highs only to plummet to post-9/11 lows. Income was high, but so were inputs, negating a lot of the gains that could have been made. High has been high, and low has been low, but what does that mean for 2009? While I am by no means a fortune teller, looking at the past will hopefully give us an idea as to what 2009 might look like.

Hay prices
Hay prices for 2008 were higher than the five-year average. Several factors played into this scenario: low carryover stocks from 2007, high milk prices, historic early-season flooding, just to name a few. Hay also rode on the coattails of other feed commodity prices as they went up. Although hay is not publicly traded, being a feed product lends itself to the rise and fall of other feed commodities.

Hay prices for 2009 will probably not see the highs that were looked for in 2008. Lower milk prices and a depressed economy in general will put negative pressure on hay prices. The latest hay market reports have shown softening prices, and there is still quite a lot of hay available. Weather conditions were more favorable to growing hay crops in 2008, so it appears stocks have somewhat recovered since last winter.

On the positive side, milk prices seem to have stabilized somewhat, and there appears to be less volatility predicted in 2009. They look to sink slightly through the first part of the year but rebound as new hay becomes available later in the spring and summer. A lot will depend on how much hay is used through the winter. Colder winter conditions will help hay prices in the spring, but a mild winter will not use up hay stock. This will become more of a wait-and-see than anything.

If anything has been a bigger drag on profitability in 2008 other than regional rain events I don’t know what they would have been. The price of everything skyrocketed in 2008 as fast as oil prices. Unfortunately, nearly every input to forage production is somehow tied to the price of oil. Fuel, fertilizer and baling products are all directly affected by the price of oil. Add on higher transportation costs and the margins to produce in 2008 were not as comfortable as many would have liked to see.

On the bright side, 2009 should see oil prices remain much lower than in 2008. As of the writing of this article, oil prices have dropped below $50 a barrel, and the price hasn’t been that low since that field of alfalfa you ripped up this fall was first seeded.

Where the problem for 2009 lies is that prices tend to not fall as fast as they go up. Fuel is the exception, but fertilizer and other related production products tend to have a more gradual fall associated with them. Fertilizer dealers will want to keep prices as high as they can to help recoup losses in 2008. The same will go for twine and wrap companies. Until the high-priced products of 2008 have cleared out of the system, don’t expect to see prices drop significantly. They will drop, but the biggest question is how long will the lag effect take.

Alfalfa seed
Here is one area where you will be paying as much in 2009 as you did in 2008. This isn’t necessarily a bad thing, but remember you are paying for production costs of last year when you buy any seed product. In every study I have ever read or followed, you get more than your investment out of quality seed rather than selecting regular, old standby varieties. This is especially true in alfalfa seed. You are making an investment for the next three to five years, so choosing the best seed you can is really in your best interest.

One variable in 2009 will be to see if Roundup Ready alfalfa will be deregulated once again. APHIS is nearing completion of their full environmental impact study and then it will head back to the courts. If it is deregulated, there will be a lot more options opened up to growers, so this will have as much of an impact as anything else.

From what I have been told, alfalfa seed is not as plentiful this year as in past years, so it is important to get your choices made sooner than later and make sure you take delivery as soon as you are able. It is always to your benefit to secure your seed purchases as soon as you can, and 2009 looks to be even more that way.

Operating funds
In case someone hadn’t noticed, we are well on our way into and through a recession. It has its roots in many areas, but 2008 hasn’t been too kind to the financial markets. While that might not openly affect everyone the same way, it will have an effect on everyone trying to get operating funds for 2009.

One of the biggest problems with the financial scene right now is the lack of ability to get credit. Banks are reluctant to lend money out in this funding environment. Because of the tight credit situation, there are a few things that will make 2009 a little tougher for some. There are, however, some things you can do to help with the situation.

One thing you will need is a good business plan. Financial institutions will be scrutinizing your operation more than in the past. Having a firm command of your market opportunities, your expenses and showing ways you can streamline your business will all be helpful when securing funding. Having a good credit score doesn’t hurt either.

When looking at large equipment or other expenditures, you will want to have a good idea as to how that purchase will help you generate more money than with what you currently have. Banks and other financial institutions realize you need equipment and property to make a living, but they want to make sure you understand how these purchases will affect your bottom line and that you have a solid plan to cover their investment in your business.

Don’t get discouraged if someone tells you no. It might take some selling of your abilities and business plan to more than one financier before you get what you need. Above all, be as realistic as you can with your plans and potential income and costs. The closer to reality you can be the better your chances of working with someone.

Other considerations
While 2008 will probably go down as a fairly good year for forage growers, 2009 is yet to be written. The economy is weighing on everyone’s minds, but agriculture has a way of riding through the storm a little better than other industries. People and animals need to eat. Being involved in an industry that covers basic needs rather than wants in tougher economies always has its advantages.

Another thing to consider is that the higher-quality forage you can produce the better off you will be when it comes to setting prices. Above everything else, quality is one bargaining chip you will have in your favor. If temperatures and weather permit, it will be critical to put up the highest-quality product you can. You might not have control of everything going on around you, but where it is possible, strive for greatness in the products you put up in 2009.

While there is a lot of uncertainty throughout the U.S. headed into 2009, I see agriculture sitting in a position to continue to ride a little higher and smoother through the problems. There are several things we don’t have a lot of control over, but since weather is the single greatest factor we deal with, uncertainty and how to deal with it plays to your strengths as a business operator. Stay positive and concentrate on what you do best, and 2009 will be another year you can look back on and say, “We headed in the right direction.”  FG

Darren Olsen
FG Editor
(800) 320-1424