Prices for supreme alfalfa hay could increase in early 2010 due to low supplies, says California hay market analyst Seth Hoyt.
“I’m estimating supreme hay delivered to Tulare, Calif., in early spring 2010 could bring $185 to $200 per ton, up from the $165-$180 range in late 2009,” Hoyt said. “Growers in the Imperial Valley could see supreme hay prices at $140 to $150/ton FOB; about a $20/ton increase over early 2009 prices.”
Hoyt is the author of “The Hoyt Report” weekly newsletter. He spoke at the California Alfalfa and Forage Association breakfast during the Western Alfalfa and Forage Conference in Reno, Nev., in December.
Hoyt’s higher alfalfa hay price prediction is based on his reduced supply forecast for 2010. Supplies will be down due to hay growers reducing acreage and production due to financial losses in 2009. This was tied to lower demand from dairies who were suffering from depressed milk prices impacted by the worldwide recession.
“The bottom line is we don’t have enough supreme hay. I think that market will be strong,” Hoyt said. “You’d think this market could be even stronger, but prices will be tempered by some dairies that will continue to buy hay hand to mouth while banks hold a tight rope on some dairies.”
As banks refinance dairies, dairies will be in the market for high quality hay, Hoyt says. Milk prices are finally improving and U.S. dairy export demand is on the rebound. California milk processors want more milk and dairymen are gearing up to meet the much-needed demand.
“The stars are starting to align again for an expansion in U.S. dairy exports,” Hoyt said.
“As that happens and the U.S. economy continues to improve, there will be more demand for U.S. dairy products.”
Other related reasons for expanded U.S. dairy exports include a continued weak U.S. dollar, reduced export subsidies for European Union dairy farmers, and a 3 percent to 4 percent drop in milk production in Australia and New Zealand.
Milk prices are slowly edging higher following a recession-caused financial downfall. Prices in 2007 and early 2008 at $18 to $20 per hundredweight (cwt.) fell abruptly to $9 to $10 cwt. during the first half of 2009. A late-year 2009 rally generated some price improvement.
Recent dairy price gains mean some California dairymen in December 2009 could have seen a marginal profit. Hoyt says the “bare bones” break-even point for California dairies is $13-$14 cwt.
Hoyt encourages dairymen to practice good risk management practices as prices increase.
“The mentality needs to change with dairy producers,” Hoyt suggested. “Many dairymen know their production costs. If they can make $1 to $2 per hundredweight, it’s a good idea to lock in at least half of the milk production using futures options or cooperative contracts to reduce market risks.”
Locked-in profits on milk production would help stabilize the dairy and hay industries when another market downturn occurs, Hoyt says. Dairymen should also lock in their grain price.
While alfalfa hay prices may increase in 2010, Hoyt predicts a 10 percent reduction overall in California alfalfa acres this year. Cotton and grain will likely replace some alfalfa replantings until the dairy-alfalfa issue levels out.
“Growers are looking at options to limit their exposure following the disaster they had in 2009 with alfalfa,” Hoyt said. “I’ve seen corn contracts in the $160-$180/ton range and hard red winter wheat contracts in the Central Valley at $200/ton,” Hoyt said.
The Pima cotton price is improving, but the Acala price is not great, Hoyt said. Some growers are looking at the government’s cotton support program for Acala as a way to make a profit.
California hay growers will remain gun-shy on new alfalfa plantings, Hoyt says, until dairies are more financially viable, can pay hay growers, and hay prices exceed $80-$100/ton.
“Until hay growers are convinced the dairies are truly on the road to recovery and there is money to be made in alfalfa, they will not be inclined to put in more hay,” Hoyt said. “The issue is show me I can make money producing hay in 2010.”
California’s Imperial Valley will likely have more alfalfa acres since fewer cropping options exist in the low desert. Hoyt says tight water supplies will also temper alfalfa interest in central California.
Lessons have been learned by the alfalfa hay market fall in 2009.
“We learned that supply and demand doesn’t work when dairies are upside down financially,” Hoyt said. “We thought 2006 was bad when dairies were losing $2 to $3 cwt. When you are losing $6 to $7 cwt., we have never seen anything like this before.”
The Western dairy industry utilizes about 75 percent of the alfalfa hay grown in California and about 65 percent of the hay grown in other Western states.
“Supply and demand doesn’t work when the dairies don’t have money,” Hoyt added. “There are other outlets for hay, but the Western dairy industry drives the alfalfa hay market.”
Hoyt hopes the dairy industry can develop ways to reduce major milk price swings in the future.
“If the U.S. dairy industry could come together and enact some version of a dairy price stabilization program, we would not have these wide swings in milk prices,” Hoyt said. “The reality is that with the individualism in the dairy industry I’m not sure if we can get a consensus on this.”