Dairies in the six western states of California, Idaho, Washington, Oregon, Utah and Arizona produce around 38 percent of the U.S. milk supply. Dairies in these states consume approximately 65 percent of the alfalfa hay produced in the seven western states.
In the past 27 months some dairies in the West have only seen six to seven months of profitability, some a few more months depending on their operation.
As a result, there has not been the normal flow of money from the dairy industry to pay for feed and services.This has a dramatic negative impact on the Western alfalfa hay market in 2009 and the first half of 2010. While the milk price outlook has improved, money flow from dairies in early 2011 is still well below normal.
But due to lower yields and production combined with lower hay carryover into 2011, the alfalfa hay market strengthened the second half of 2010 with early January 2011 prices up $30 to $50 per ton from a year ago.
This, combined with alfalfa hay being taken out of production due to planting of alternative crops with more profit potential, has created an interesting scenario as we enter the 2011 alfalfa hay market season in the West.
Milk price trends lagging behind most other commodities
In the past few months we have seen prices on commodities such as corn, wheat, soybeans, cotton and others make sharp upward moves. At the same time milk prices have been trending lower. After reaching a high in October, Western milk prices dropped in November and December.
Very strong butter and nonfat dry milk prices in early January have raised the milk price outlook for the coming months. Dairies are still struggling with cash flow but it appears that there may be better days ahead. However, due to the tremendous amount of money lost in the dairy industry the past two years, it will take many months of strong profitability to restore financial health to dairies in the West.
Cold and wet weather in the U.S. in December and early January should slow milk production. The one negative has been the cheese market. U.S. cheese production in November was up 6 percent from November 2009. While U.S. dairy exports are running at record highs, domestic cheese consumption still lags behind the robust usage seen the first half of 2008.
While there have been recent price increases on cheese, it pales in comparison to the very bullish butter and powder markets.
Money problems in the dairy industry impacting growers’ planting decisions
Dairies are the largest buyer of alfalfa hay in the West. When dairies are not in sound financial condition and if there are alternative crops to plant with profit potential, growers will plant other crops to lessen their exposure to the dairy industry.
This is what will happen in 2011 in most of the seven western states: more wheat, corn, and cotton and less alfalfa hay overall. And for many growers, it is not a difficult decision because of the very strong markets on those three crops.
Growers are not only looking at profitability but also the assurance that they will get paid in a timely manner, something that has not happened over the past 24 months. These developments are not good news for the large Western dairy industry, where alfalfa hay is a necessary staple in milk cow rations and is favored in dry cow rations.
There are 2.9 million dairy cows in the six western states, with 85 percent of them always in a milking status. Alfalfa hay is an important feed for milk production.
Lower alfalfa hay acres in the West in 2011
There are strong indications that alfalfa hay acres in the seven western states in 2011 will be down around 5 to 10 percent. This on top of what looks to be a smaller hay carryover into 2011 in the West will push hay supplies down even further.
If there are any weather issues that push alfalfa yields below normal, this would make a tense hay supply picture for the West in 2011. While dairies can reduce the pounds of alfalfa hay fed to dairy cows, in order to maintain production and cow health, a minimum amount of alfalfa hay needs to be in milk cow rations.
If dairies were sound financially and milk prices were strong, we would be looking at an alfalfa hay market in the West similar to the very bullish market the first half of 2008. However, even if milk prices strengthen in the coming months, some dairies will still have to purchase hay on a short-term basis because they will not have the money to make volume purchases.
Dairies in better condition financially will fare much better in the environment of dairies chasing fewer hay supplies.
Small hay inventories at dairies/strong exports bullish to alfalfa hay prices
The early new-crop alfalfa hay market in the West in 2011 will be higher than the early market last year. Dairies will be forced to pay more than they would like for hay. There will be fewer acres of alfalfa hay and export demand looks to be strong.
Overseas customers won’t be happy about paying more for West Coast hay in 2011, but with the outlook for lower world hay supplies they will have few choices.
There is plenty of evidence that dairies in the West and particularly in California have smaller inventories of hay on hand. The many dealers that buy hay for dairies indicate that hay supplies are low at many of the dairies they service, both small and larger dairies.
Many dairies have not had the cash to make volume purchases of hay, consequently a large number will be out of hay in the next 30 to 60 days.
While I previously predicted higher alfalfa hay prices on first cutting in the West compared to the previous year, the recent improved milk price outlook and more evidence of very light hay inventories at dairies makes my earlier hay predictions too low.
There are growers in the Imperial Valley, Idaho, and Washington State that feel first-cutting supreme alfalfa hay prices will reach $200 per ton. My predictions this past October were $40 to $50 per ton below that level.
I have since revised my earlier estimates on first cutting Supreme alfalfa hay prices to be in the $160 to $180 per ton range in the West, depending on location. In my opinion, the only area that could reach $200 FOB is in the central valley of California, where there is a very large concentration of dairies.
Having said that, if milk prices in the coming months jump higher than expected, will my hay price predictions be too low? Maybe they will, but then again maybe not. Stronger milk prices are not going to instantly heal dairies financially after two years of heavy losses.
We must remember that grain and other feed prices are much stronger than a year ago as well. It would be surprising to see the market reach $200 per ton FOB in Idaho, Washington, and the Imperial Valley on first-cutting supreme alfalfa hay.
Food for thought
In the months ahead the U.S. dairy industry will be looking at strategies to keep from repeating the financial disaster of the past two years. While it may be wishful thinking that the industry would embrace, or that there would be a consensus on a milk supply management program,
I hope that the status quo will not prevail. An element that needs to be in these discussions is that the boom and bust cycles in the dairy industry, due to wide swings in milk prices, will drive more hay, corn silage and other forage crops, grown for the dairy industry, into other commodities.
Some experts say that the down cycles in milk prices could get worse in the future unless there are changes made in the U.S. dairy industry.
In 2011, we will witness the shift from hay into other commodities that not only have strong profit potential but where there is more secure money. This will not only drive hay and corn silage prices higher, but there will be times when dairies will not be able to purchase the amount of feed they need.
There are dairies in central California that will not have enough corn silage to make it through to this year’s new crop. Let us hope the dairy industry can come up with a plan that will not only bring more milk price stability, but more financial stability at dairies.
There must be incentive for hay and silage growers throughout the West and the nation to grow feed for the dairy industry, a vital industry in U.S. agriculture. FG