Buying, Selling Standing Forage? Here’s How to Arrive at Fairest Deal

By Jane Fyksen, Crops Editor
Thursday, May 22, 2008 12:05 PM CDT

With a tight hay situation this year, more dairy and livestock producers may be interested in buying standing forage. A University of Wisconsin team of experts n forage specialist Dan Understander, numbers cruncher Ken Barnett, and agents Ted Bay (Grant and Lafayette counties) and Rhonda Gildersleeve (Iowa County) n has tips for pricing standing hay and haylage.

Obviously, a deal based on actual yield is best n determined by weighing loads or estimated by weighing a few bales and counting total bales harvested. To estimate relative yield for individual cuttings (in a three-cuttings system), figure first crop will be 40 percent of total yield, with the second and third crops each contributing 30 percent. In a four-cutting system, it’s safe to figure that first crop will be 35 percent of total yield for the season, second crop 25 percent and third and fourth crops 20 percent each.

If the seller says he can typically expect four tons per acre from three cuttings, the first cutting you’re buying would be estimated at 1.6 tons per acre.

Obviously, if you’ll be making haylage, moisture content has to be determined to convert haylage yields to a hay equivalent. Here’s the formula: (haylage yield times dry matter) divided by dry matter of hay. If first-crop yield is three tons to the acre of haylage at 40 percent DM, this haylage is converted to hay equivalent as follows: (3 tons x 0.40 (percent DM)) divided by 0.87 (percent DM of hay) or 1.38 tons of “hay yield.”

What about quality? Timeliness of cutting and percentage of alfalfa versus weeds in the stand have an impact. Obviously, forage samples best determine quality. However, if you’re not going to bother to sample, be prepared to pay a premium for pure alfalfa or alfalfa mixed with a high quality grass over an older stand that’s weedy.

Harvesting costs are factored into stand value. So should hauling costs. Approximate harvesting costs per cutting (for three cuttings, labor at $12 an hour, and yield of 4 to 4.5 tons of hay per acre) are: Cutting, $13 an acre; raking, $13 per acre; baling $25 to $30 per ton; hauling, $8 per ton; chopping, hauling and filling, $48 per acre; and wrapping $6 to $7 per bale.

For contracts over the entire season, growers also need to agree on other costs such as for insecticide or fertilizer applications. Fertilizer prices have soared this spring. To sellers, these forage experts say: “Make sure that the fertilizer costs per acre are known,” otherwise, you “may not be charging enough to cover the annual costs for the established alfalfa stand.” At current fertilizer prices, each ton of hay removes about $45 to $50 worth of nutrients.

Let’s say the proposed deal is three cuttings sold to a buyer who also harvests the forage (with total season yield estimated at four tons per acre). What might the seller’s minimum price on a per-acre annual basis? Let’s say it’s $312 (total annual cost of established alfalfa), or: $72 land charge, $5 for taxes and insurance, $45 stand establishment (seed and lime), and $190 for maintaining the stand (i.e. fertilizer). It should be noted that land charge is less than a full-season rental rate because these arrangements are assumed to be after normal planting season.

What’s the maximum price the buyer is willing to pay? He assesses that the market value of hay is $120 a ton, and buying four tons would run $480 an acre. To cut, rake, bale and haul three cuttings is $212 an acre. Subtract a weather risk of 15 percent of hay value, or $71.82. Also subtract a dry matter loss (2 percent of hay value) of $9.57. (As for DM loss of forage in storage, it’s about 2 percent for hay stored off the ground and covered and 20 percent for silage stored properly in a tube, bunker or upright silo.) Thus a breakeven cost for standing hay per acre would be $186.61.

Obviously, both buyer and seller want to gain from the transaction. “In this example, however, the seller’s annual cost of $312 per acre is higher than the breakeven price per acre for the buyer of $186 per acre,” this team points out.

“The final sale value could be based on actual measured yield. With expected yield of four tons per acre, the seller has a minimum $78 per ton price and the buyer a maximum $46.45 per ton value. Total harvest expense is approximately $73 per ton,” they note.

If only one cutting is involved, buyer and seller can use the following examples to calculate value with information above as well. Here’s how the seller can figure an expected minimum value for first cutting, based on a total annual cost determined in the first example above:

- Land cost - $72 per acre times 0.40 or $28.80

- Taxes and insurance - $5 per acre times 0.40 or $2

- Stand establishment - $45 per acre times 0.40 or $18

- Maintaining stand - $190 per acre times 0.40 or $76.

The total annual cost of established hay for first-crop only would be $124.80.

Now for the buyer’s maximum or breakeven price paid for silage needs to be calculated on a hay equivalent basis as follows:

- Market value of hay n 1.6 tons times $120 per ton or $192

- Cut, chop, haul and fill - $74

- Weather risk (15 percent of hay value) - $28.80

- DM loss (10 percent of silage value) - $19.15.

His breakeven price for standing first-crop would be $70.05, or rounded off to $70 a ton. Total harvest expenses for haylage in this example are estimated at $76 per ton of hay equivalent.

The sale of second and third crops can be based on this same approach. A simplified pricing arrangement could be a charge of $130 per acre for first cutting or $190 per acre for second and third cuttings or $320 per acre for all three crops. This team notes that these are net prices paid to the landowner. They may be acceptable to a buyer if expected yields are greater than four tons per acre and the agreement is made in time to allow harvest of first cutting at a relative feed value of 170 or greater. In this price range, yields greater than four tons per acre would have a value that would cover the purchase price above and harvest expenses.

Risk needs to be taken into account. Lower-than-expected yields or weather delays lowering forage quality can “greatly” reduce the net gain of buying standing hay, these four warn. Producers, they say, need to adjust number in their examples to reflect current market conditions, yield and harvest timeliness.

Contracts signed well before harvest and full-season contracts should reflect a lower price due to the greater risk the buyer is assuming. On the other hand, 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.

A rule of thumb is to value risk at 15 percent of hay value per cutting.

These UW experts recommend written agreements that include price, when payment is due, who is paying insecticide cost, the method of determining yield when selling by the ton and other factors.

Current hay prices can be found at http://www.uwex.edu/ces/forage/pubs/hay_market_report.htm.

There’s also a handy excel spreadsheet at http://ipcm.wisc.edu/Portals/0/Blog/Files/18/526/Price-Standing-Forage-Worksheet.xls, that a buyer can use to punch in his own numbers for determining cost for hay and haylage or a seller can use to determine his costs that Barnett, working for the UW’s Center for Dairy Profitability, developed.

More information on haying operation charges can be had from Wisconsin’s 2007 custom rate guide online at http://www.nass.usda.gov/Statistics_by_State/Wisconsin/Publications/custom_rates_2007.pdf.

Growers can email Barnett with questions (mailto:ken.barnett@ces.uwex.edu).

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