Pricing options for hay harvest agreements
Hay values are driven by supply and demand. In 2012, values remained high due to drought and limited supply and in 2013, values continue to remain fairly high, primarily due to limited hay acres.
Determining a fair pricing system for haying Conservation Reserve Program (CRP) grass, prairie grass, or old field forage has been a hot topic as these hay markets continue to retain high market values, said Pete Bauman, South Dakota State University Extension range field specialist.
“On the heels of drought, many growers are surprised by the excellent growth year for grasses, especially in the east. Consequently, landowners are being approached by hay contractors interested in harvesting hay in various grasslands or pastures,” he said. “Due to a strong production year, additional acres such as emergency CRP likely will not be available as they were in 2012, making grass hay less available.”
Traditionally, Bauman said hay crop harvest agreements have primarily been on a per-acre rental basis or a crop sharing basis. However, he said recently, landowners with a hay crop that have no interest in physical retention of the hay crop have inquired about cash based contract agreements.
Below, Bauman explains the basics of various hay contract agreement, noting that in any case, the key is to agreeing on the front end what type of terms the agreement will contain:
Cash Rent (per acre): In this system, the hay contractor pays the landowner a set fee for each acre of hay land. The benefit of this type of agreement is it can be based on relatively average hay production for the field and a fair price can be set. The downside to this type of agreement is that to be fair, good records of annual production should be kept. Fluctuations in hay value, quality, and quantity due to weather or markets can result in either the landowner or the hay contractor believing the agreement is not fair.
For example, in low-yield years, the hay contractor will receive less profit for relatively the same input costs while the landowner’s profit remains unchanged—resulting in the hay contractor wanting reduced rental prices. In high-yield years, the hay contractor will receive greater profits for relatively the same input cost while the landowner’s profit remains unchanged, resulting in the landowner wanting increased rental prices. Unfortunately, yield cannot generally be predetermined and, thus, risk to both parties is inherent in the agreement.
Share Cropping (traditional): There are two variations of this system. Traditionally with share cropping, both the landowner and the hay contractor are interested in retaining ownership of the physical hay crop. Generally, these agreements consist of an agreed upon ratio of retention for each party. Typically, the hay contractor receives two-thirds of the hay crop and the landowner receives one-third. Both parties have the option to either sell, store, or feed their portion of the crop.
Share Cropping (cash purchase): This type of contract is similar to the traditional, with the exception that the hay contractor purchases the landowner’s portion of the hay crop immediately. This purchase agreement is based on the market value or any mutually agreeable value. Value may be based on tonnage or per bale.
Share cropping agreements described above can be very fair as both the landowner and the hay contractor share the risk and rewards of hay markets, quality, and quantity. However, determining the correct share ratio can be a point of contention under certain market or harvest scenarios if volume and price are dramatically different than initially expected.
Similar to issues that can arise with per acre rent, hay contractor harvest inputs generally remain constant regardless of hay value or quantity. In low quantity situations, the hay contractor receives less ‘profit’ in relation to input expenses and therefore may wish to renegotiate the terms of the share. Conversely, in high market scenarios, landowners may feel that they are not receiving a large enough portion of the profit potential and may want to negotiate for a higher portion of the share.
Cash Agreements: A third option which is receiving much interest lately is a cash-based agreement that accounts for total hay value less the pre-determined value of the cost of production to the hay contractor. Essentially, this system is very similar to the share cropping agreements but it allows for the hay contractor and landowner to discuss and agree upon a fixed rate for harvest costs, of which the hay contractor is fully reimbursed for regardless of the quality, quantity, or value of the hay.
In a typical cash agreement, the landowner has no desire to retain any interest in the hay crop. The hay contractor desires to purchase the hay from the landowner. Often, these relationships are the result of a hay contractor approaching a landowner with an offer to harvest the standing crop of hay for the landowner. After the Hay Contractor Expenses are accounted for (usually cost per bale), it is then subtracted from the Initial Hay Value to determine the Final Hay Value (the amount paid to the landowner). See the example.
A cash agreement offers a great deal of appeal for landowners and hay contractors because it can reduce ambiguity in the relationship, therefore decreasing the risk of a contract being considered ‘unfair’ by one or both parties. Cash agreements allow for the landowner to reap increased rewards during high yield years while protecting the hay contractor from relatively high harvest expenses (cutting, raking, baling, transport, etc.) in low yield years. The hay contractor assumes all risk/reward resulting from use or sale of the hay after paying the landowner for the hay crop.
For landowners who wish to maximize their potential profits while ensuring fairness in their relationship with the hay contractor, this type of agreement is valuable. Below is a simple equation that can create and maintain equality in a hay harvest relationship. With a small amount of homework, the landowner and the hay contractor can develop contract parameters that are fair and equitable based on actual product produced.
Background information necessary for a successful Cash Agreement:
Type: Generally hay crops are categorized as alfalfa, alfalfa/grass mixed, grass, straw, etc.
Quality: Generally, grass hay quality is affected by three primary factors: Species, timing of harvest and handling. If grass hay is harvested prior to seed set, forage quality can generally be assumed to be very good. Cool season grasses such as smooth brome should generally be harvested in late spring/early summer while warm season species should be harvested in mid-summer (depending on the year). If harvest timing is off, you may have excellent volume with poor quality or vice-versa. Many times, harvest dates are dictated by various agricultural program rules, so be certain you understand what factors might dictate your harvest dates. Handling and exposure to moisture can also be a major factor in grass hay quality.
Value: Value can be determined by checking your hay type and quality against local markets and auction companies. Sales reports are fairly standardized and reported categorically as type of bale (i.e. large round, small round, large square, etc.), quality [supreme, premium, good, fair or utility (or similar terminology)], and price is reported as dollars per ton (not dollars per bale).
Tonnage or pounds per bale: Most producers have an estimate of what size of bales their baler averages. Some balers may even be equipped with scales. In many cases, round bales generally weigh about 1,000- 1,200 lbs. (roughly 1/2 ton). However, balers can be variable and landowners and producers should work together to verify the average bale weight.
Bale count: How many bales were actually produced?
Producer investment: Harvesting requires an investment into labor, equipment, and fuel. Harvest investment of $20-25 per bale is not uncommon, but again, landowners and producers should mutually agree upon this value prior to harvest. — WLJ