What I Know about Forage Economics?

Gordon Groover Extension Economist, Department of Agricultural & Applied Economics, Virginia Tech

First, the key assumption behind this article is that the farm business in managed to make a profit. A second assumption is that the environment farm business managers face is not constant, or to quote Heraclitus, (535 BCE), “The only constant is change.” That is, as prices and technology change then management strategies, enterprises, and capital investments must change for the farm to remain profitable.  For example, few cow-calf producers harvest and feed corn silage to their beef cow herd as opposed to what was a common practice 40-50 years ago. Corn silage was and is still a high quality feed for ruminants, yet the capital investment to plant, harvest, transport, store, and feed has increased the total costs of corn silage. On a relative costs basis and with the help of round bale technology the cost of making hay was less than corn silage, leading to wholesale adoption for winter feeding of hay for beef cattle. The round baler reduced labor costs, allowing 1-2 people to harvest and transport hay as opposed to hiring the high school football team to pick up bales and stack them in the barn. This lower labor costs and more efficient harvest and feeding of round bales pushed out corn silage as a winter feed starting in the late 1980’s and early 1990’s.  Harvesting and feeding hay has and is still the primary source of winter feed for most cow-calf producers, yet as we see the capital costs of machinery and equipment required to harvest and feed hay reaching $250,000, we are left to ask, “what might offer a cheaper and/or more efficient alternatives to harvesting, storing, and feeding hay for livestock? The question is easier than the answers.  Here are a few brief discussion points to consider.

  • A quick back of the envelope calculation of straight-line depreciation of the hay making machinery and equipment over a 15-year life for the equipment, yields $16,667 of annual depreciation (there are other fixed costs like insurance, taxes, interest, and others that should be included).  Also if you have a 40 beef cows and feed hay 120 days you will need to harvest about 72 tons of hay (25 lbs. per cow per day, plus a 25% harvest and handling loss) annually, and based on an average yield of 2.2 tons per yield per acre you’ll need about 34 acres of hay. So before considering any out-of-pocket costs of making that crop, the farm has $231 per ton in depreciation or about $500 per acre annual fixed costs. This quick example illustrates that smaller sized beef cattle operations with less than 100 cows should not consider owning hay equipment. Note, used equipment will reduce fixed costs, yet the fixed costs saving must be sufficient enough to reduce your total costs as compared to off farm purchases of hay.
  • Rotational grazing supported by improved fencing and water systems has allowed livestock producers to improve utilization of the forages and reduce the need for stored forages. In addition, stockpiling of tall fescue allows for extending the grazing season, further reducing the need for stored forages.  Like the round-baler was a change in technology that reduced the cost of harvesting and storing forages, improvements in fence and water systems via controlling animal intake are providing a means to the reduce total feeding costs.  This should not be construed to mean that the farm will not need stored forages for winter or drought feeding, yet the amount should be less. Also consider, if you own all your hay equipment and you implement rotational grazing, you may actual increase your total costs and reduce your ability to remain profitable. Thus consider the necessity to calculate your total costs and compare alternatives such as reducing your equipment investment and purchasing hay, otherwise you may have the worst of both worlds, well, in terms of costs. Relying on purchased hay also requires that you develop a long-term strategy to obtain the hay needed to cover grazing deficits.
  • A side note, if your hay supply is the sole sourced from your farm and you experience a drought you will buy your hay twice that feeding season. That is, the annual expenses of fertilizing and maintaining the stand, plus the expenses of purchasing new hay to replace the drought loss. A long-term strategy for your hay supply is the key to a reliable hay supply year-in and year-out.
  • Purchasing hay comes with a redeemable coupon. The value of that coupon is determent by the nutrients in that bale of hay, the price of each nutrient, and how the hay is fed.  A quick estimated could yield $30-$50 worth of nutrients as a rebate on the purchase price of the hay. However, there can be drawbacks to redeeming this coupon. First, if you feed hay in one location, concentrating all the off-farm nutrients will not provide much benefit the farm’s pastures.  Rotational feeding of hay around the farm will help disperse the nutrients across the pastures. Second, you may import weeds and undesirable plants to your farm potentially increasing costs to manage pastures.
  • Increasing pasture utilization via rotational grazing and purchasing hay off the farm has the potential to increased livestock or caring capacity and profits. This assumption depends greatly on the farm’s starting point and overall management. Note: Machinery and equipment are a costs not an income producing asset (unless you do custom work), and most importantly, cows are the only income producing asset on most beef cattle operations.
  • A few side notes: 1) annual leases do not support investment in grazing infrastructure and for these farms to be successful, most will rely on feeding hay. Negotiating long-term leases that support improved grazing infrastructure can be structured to benefit both the landlord and tenant and support eligibility for cost-share; 2) famers with multiple farms that cannot be managed as a unit provide challenges to efficient grazing and in all likelihood must rely on hay feeding; and 3) machinery fixed costs are lower on diversified farms that make use of equipment over a larger acreage, thus lowering the total annual fixed costs across all enterprises.

Jump ahead a few decades, what technology will come along that will make rotational grazing more or less cost effective? No one knows, new research may lead to genetic changes in animal and/or plants, new harvesting technologies that would reduce total forage harvesting costs, or improved animal control technology using GPS or some other technology further reducing grazing cost. These are all speculations on the future, yet farmers and their advisors will need to know and weigh their costs and benefits for their farm business as these changes appear in their future. As Heraclitus states, “the only constant is change.”  I know that the economics of forages production alternatives will change and understanding your costs will help stay ahead of these future challenges to remain profitable.

This entry was posted in Articles and tagged , , , , , . Bookmark the permalink.

Leave a Reply

Your email address will not be published. Required fields are marked *