Will Hay Be the Next Gold?

Published on: 11:02AM Jan 21, 2013

As the milk supply grows to meet demand, concern over adequate hay stocks heightens.

It certainly has been difficult over the past year in terms of profitability. A year ago, feed prices were somewhat lower but so were milk prices. The March corn futures contract was trading near $6.35 at this time last year while March soybean meal was near $325.00 per ton. The January Class III price was $17.05 with a Class IV price of $16.56 and a milk/feed ratio of 1.72.

Currently, March corn futures are nearly $1.00 higher with soybean meal futures nearly $100.00 per ton higher. The January Class III price is expected to be $18.14 per cwt. and Class IV, $17.59. The January milk/feed ratio is yet unknown but is expected to be around 1.65. So, we have gone a whole year with virtually no change in the correlation of milk prices to feed prices despite significant volatility.

There was much anticipation for a tight milk supply as high levels of slaughter were taking place as a result in high feed prices last year. Dairy operations were going out of business with overall cow numbers declining. However, declining cow numbers were short-lived and began slowly increasing in recent months. Along with this, production per cow also began to improve, resulting in sufficient amounts of milk available for demand. In fact, the Midwest region increased production significantly. Milk receipts over the past two months have been higher than usual for this time of year. Milk was, and still is, being offered to manufacturers at discounts in order to entice buyers. Some of the other regions of the country are not quite as flush with milk but still have sufficient supply to meet demand.

Dairy producers continue to find ways to improve milk production as well as manage costs. This does not mean there has been much profit, but yet it seems there is enough incentive to continue to produce and improve, much like any other business would do.

It is difficult to predict what this year holds for us. Weather will be the deciding factor for many things and businesses. We could see grain stocks increase significantly if we have ideal weather pushing yields above the trend line. However, even ideal weather may not have great impact on hay supply.

National Agricultural Statistics Service (NASS) reported on its 2012 "Crop Production Summary" that alfalfa and alfalfa hay mixture production was at the lowest level since 1953. Hay production was estimated at 52.0 million tons, down 20% from 2011. The drought had a significant impact, with harvested acres the lowest since 1948. USDA indicated on its latest "Quarterly Grain Stocks" report that hay stocks on Dec. 1 totaled 76.5 million tons, down 16% from last year and the lowest hay stocks since 1957.

Reduced hay production is becoming a greater concern as more acres are being turned into row-crop production. Dairy farms that cease milking cows many times will either move to grain production themselves or will rent the land to someone who may produce grain on those acres rather than more labor intensive hay production. High grain prices will increase the desire to plant row crops.

Increasing land rents do not provide incentive for hay production either. This may push hay prices up even further as supply tightens. This can be a great opportunity as a cash crop for those who desire to meet that market, but generally row crops seem to be preferred. What is ironic is that even though hay stocks have tightened substantially, hay exports have increased significantly. According to USDA’s Foreign Agricultural Service, exports of alfalfa hay for the first 11 months of 2012 totaled 1.749 million tons, up 10% from the previous year. Exports of other hay totaled 1.947 million tons, up 19% last year. This is expected to increase as world wide demand for hay improves.

Upcoming reports:

- December Cold Storage report on Jan. 22
- December Milk Production report on Jan. 23
- December Livestock Slaughter report on Jan. 24
- January Federal Order class prices on Jan. 30
- Agricultural Prices report on Jan. 31
- Bi-Annual Cattle Inventory report on Feb. 1

Robin Schmahl is a commodity broker and owner of AgDairy LLC, a full-service commodity brokerage firm located in Elkhart Lake, Wisconsin. He can be reached at 877-256-3253 or through their website at www.agdairy.com.

The thoughts expressed and the data from which they are drawn are believed to be reliable but cannot be guaranteed. Any opinions expressed are subject to change without notice. There is risk of loss in trading and my not be suitable for everyone. Those acting on this information are responsible for their own actions.