Lack of dairy demand pushing hay prices down

Jun 26, 2009
by WLJ

Lack of dairy demand pushing hay prices down

The recent dairy cow buyout, made possible by Cooperatives Working Together (CWT), a dairy industry interest group developed by the National Dairy Producers Federation, has taken nearly 40,000 cows in western states out of production, but other economic factors, including extremely low milk prices, are also causing dairymen not selected for the buyout to send cows down the road.

If an average dairy cow weighs about 1,400 pounds and consumes 3 percent to 3.5 percent of her weight in feed per day on a 60 percent dry matter basis, the average cow would consume about 30 pounds of hay per day. The buyout in California alone removed about 25,000 head from production. This means about 500 ton of hay per day is no longer being consumed by the dairy market. However, this is likely a drastic underestimate, considering most dairies not included in the buyout are culling at a much higher rate than normal. The amount of hay still sitting in the stack is likely much higher.

Seth Hoyt, a hay market analyst and author of The Hoyt Report in Ione, CA, said financial losses in the dairy industry have driven hay prices sharply below the prices cattle producers were seeing last year.

"With more and more dairies having cash flow problems, we are seeing a large decrease in demand for hay," Hot said.

The CWT buyout is just one avenue dairymen have pursued. Because of the volatile situation most dairy producers are in, many of them are sending cattle to market and we are also seeing banks pulling the plug on dairies that have simply run out of equity. With more and more cows leaving production, the demand for hay is also falling, subsequently driving hay prices down.

Hoyt explained that nearly 75 percent of the alfalfa in California is consumed by the state’s massive dairy herd. He said with hay in some areas dropping as low as $80 to $90 per ton, hay growers are spending more in production than they are able to get out of their hay crop. Hoyt said up to 25 percent of the hay acres in California’s Imperial Valley are going to seed production, rather than for hay production.

According to the weekly California hay report from the USDA’s Ag Marketing Service, the price of high-quality alfalfa hay varied this time last year from as high as $280/ton in the south central coast area to $205/ton in the north of the state, with the rest of the state falling somewhere in between. Last week, the report shows the prices statewide are almost exactly half of what they were this time last year.

Despite a major projected decrease in the demand for hay as more cattle are taken out of production, Hoyt said the extremely wet month of June in the West could decrease the supply of milk cow quality alfalfa, but make hay even cheaper for the cow/calf producer, who does not require the same premium level of alfalfa that dairymen are looking for. This could, however, bring hay prices up for the already suffering dairy industry.

Hoyt said with 1.8 million dairy cows in California, it could take as many as a few hundred thousand coming out of production nationwide to bring milk prices back to profitability.

"When and if the dairy market turns, there could be a tighter supply of hay throughout the western states of Idaho, Utah and Nevada, which have all seen one of the wettest Junes on record," Hoyt said. "That scenario would drive prices for hay back up, but that scenario is still a ways off from where we are at today."

A Holstein feedlot operator in the Imperial Valley, Paul Cameron, of Mesquite Cattle Feeders in Brawley, CA, also buys and sells hay and says the dairy and hay markets have created a very interesting dynamic.

"Right now, we are putting up hay that goes to feed dry cows in the dairy sector and we are seeing very depressed prices," Cameron said. "I attribute the prices to many economic factors, but predominantly, I think low milk prices and a dragging economy are responsible."

Cameron says it was known that dairies were in trouble long before the buyout was announced.

"While milk prices have slipped dramatically in 2009, we were seeing dairymen literally buying hay hand-to-mouth," Cameron explained. "I don’t think the buyout itself is having much of an impact on hay prices because the market was depressed long before that."

Cameron said the highest price for milk cow hay right now is $115 to $120 per ton in the Imperial Valley, whereas this time last year, dairymen were paying $215 to $230 per ton.

Cameron, who is the vice chairman for the California Cattlemen’s Association’s Feeder Council, said he doesn’t feel that the dairy situation has been detrimental to the feedlot industry in California just yet.

"If anything, the current hay situation has helped feedlot operators build up a cheaper inventory of hay," Cameron said. "We are also seeing cheaper corn for the first time in a long time. Just in the last week, corn prices dropped nearly 50 cents a bushel. The competition for corn in the United States in the past few years has been extreme, so it is a relief for us feedlot guys to see a drop there."

Corn exports are looking a little smaller, leaving more corn in the states for use by livestock owners, according to Cameron.

"But end-users are also down as dairy, beef and pork producers are all hurting, leaving even more corn for livestock production, but that could change quickly if ethanol markets buy it up," Cameron said.

While the decrease of Holstein cows in California is likely to continue, Cameron said the impact to Holstein feedlots won’t be seen for some time. The inventory of feeder cattle in the Imperial Valley is already down, but other than that, he says, the only real indicator that something is different in the feedlot industry is that feed, for the first time in a long time, is cheaper.

As a hay grower, Cameron says he is feeling the pinch. But as a feedlot owner, he knows it is a relief to many guys like him to have a major break in the price of hay compared to this time last year.

"Cattle prices are still very low for the beef industry, so a break in the feed of our cattle may help offset the low cattle prices, at least for now." Cameron said. — WLJ