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July 1, 2004 The Value of Standing Hay How much is standing hay worth? Most hay is sold as a harvested product, so the cost of production does not have a direct impact on the market price. Production costs are sunk costs after harvest. Once harvested, the owner can only expect to receive what the market will give, and the buyer will likely be reluctant to pay more than the local market price. “Purchasing a standing hay crop is similar to purchasing harvested hay except the quantity and quality of the hay is yet to be determined,” says Dwight Aakre, Extension farm management specialist at North Dakota State University. “Also, the harvesting costs typically will be incurred by the purchaser rather than the seller as is the case with purchasing harvested hay. If the hay is purchased by the ton, the uncertainty regarding quantity is eliminated, but if purchased by the acre, the buyer assumes the risk associated with yield.” Purchasing standing hay leaves the quality risk with the buyer, Aakre notes. The buyer determines when and how harvest will be accomplished, which will impact the quality of the hay produced. Since the risk associated with poor harvest weather is beyond control, the buyer likely will discount the value of the hay to be harvested relative to the expected quality. Likewise, the seller would likely accept less because he can not be sure that he would have the expected quality if he harvested the hay. Harvesting and hauling costs are shifted from the seller to the buyer when hay is purchased standing in the field. Harvesting and hauling costs converted to dollars per ton need to be subtracted from the expected local market price because of the additional costs incurred by the buyer and savings to the seller. As an example, assume an alfalfa stand with an expected total yield of three tons per acre from three cuttings is available for cash rent. If this is a pure stand of alfalfa, good management combined with good luck (as it pertains to weather) should result in gross revenue potential of about $60 per ton or $180 per acre. “However, the price of hay is very dependent upon location,” Aakre says. “If there is a high demand locally, the price may be considerably higher. Due to the bulky nature of hay, its value falls rapidly with increased distance to markets.” Using economic costs estimates for ownership and operating costs of farm machinery, expect mowing and conditioning costs of $28 per acre, baling costs of $35 per acre and hauling costs of $10 per acre. This represents a $73 per acre expense that must be deducted from the gross value of production to derive the maximum cash rent the buyer would be willing to pay. Making no adjustments for risk, the maximum cash rent for this example would be $107 per acre. Anything more, the buyer would be better off purchasing harvested hay of known quality. “However, risk cannot be ignored,” Aakre says. “Harvesting and hauling expenses can be estimated with reasonable certainty while yield and quality, on the other hand, can not. The way to compensate for this risk is to adjust the expected gross revenue. If the yield was reduced to 2.5 tons per acre but still valued at $60 per ton, the gross value of production would then be $150 per acre. If the expected three tons per acre yield was realized, but half of the hay was damaged by rain so that it was only worth $40 per ton, the gross value of production would also be $150 per acre. In either case, the maximum affordable rent would be $77 per acre. ### Source: Dwight
Aakre, (701) 231-7378, dwight.aakre@ndsu.nodak.edu |
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North Dakota State University |
