Weaker dairy demand will dampen prices
Demand and prices for alfalfa hay in the Western states are likely to drop this year as the commodity’s biggest customer—the dairy industry—enters a period of red ink.
That’s the forecast of hay market analyst Seth Hoyt, who believes prices for this spring’s first cutting of supreme dairy hay (fob) in several Western states will fall to the $210 to $270 per ton range. That’s a sharp drop from the $330 per ton some California dairies paid last year.
"These are still fantastic prices, but you won’t see a big increase because the main customers are going into negative cash flow," Hoyt says.
There won’t be an abundance of hay, either. Hoyt expects 2012 alfalfa production to rise only 3% to 5% over last year in California, Idaho, Nevada, Utah and Arizona.
Although the hay market remains strong, especially in the export arena, the troubled dairy industry—which buys 65% of the alfalfa in the West—"is still the main driver of our markets," Hoyt says.
He points to the imbalance between California’s milk price and its dairies’ cost of production. March milk prices are projected to fall to $14.25 per cwt. versus $17.31 per cwt. a year earlier. Production costs for the state’s Central Valley dairies have risen to $15 to $16 minimum, Hoyt says, while in the Chino area farther south, they’re even higher.
Alfalfa acreage and production dropped 3% to 4% in 2011 in the 11 Western states. The lower supply coupled with high prices led dairies to consume less alfalfa. Hoyt estimates that California dairies consumed 700,000 fewer tons of alfalfa in 2011 than in 2010. Daily alfalfa rations dropped to 8.6 lb. in the third quarter of 2011, compared to 11.2 lb. in 2010. One Idaho dairy dropped its hay ration from 14 lb. to 7 lb.
Many dairies displaced alfalfa with increased corn silage rations. The same Idaho dairy boosted its daily corn silage feedings from 45 lb. to 65 lb. Yet even rolled corn prices soared to $330 per ton in mid-2011 in the Tulare, Calif., area. The corn market has cooled since last year, and corn at today’s $5 per bu. translates to about $282 per ton for rolled corn delivered to Tulare.
The spread between rolled corn and supreme alfalfa hay has widened in the last four months, with rolled corn now some $30 to $50 per ton less than alfalfa, Hoyt says.
Exports of U.S. hay, which account for 14% to 15% of demand, will remain robust, he says. "Shipments to China have seen tremendous growth in the last four years, and were up 28% in 2011."
China’s dairy industry will grow and hay exports from the Western U.S. to China will increase, Hoyt predicts. Nestle, the global food company, is building its presence there and "training Chinese dairymen how to handle 500 cows instead of five or 10," he adds. Nestle is also guaranteeing loans to Chinese farmers to buy more cows.