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How Much Does That Hay Cost and What Should I Charge?

Authors as Published

Gordon Groover (groover@vt.edu), Extension Economist, Farm Management, Department of Agricultural and Applied Economics, Virginia Tech

Introduction

Popular press and other media outlets are saturated with simple and very complex strategies on how to price a product or service.  Yet they all start with four basic concepts:  1) know your cost of production; 2) know the prevailing market price; 3) produce what your customer wants; and 4) sell quality products at reasonable prices and with quality service.  Producing hay as a cash crop is a challenge to meet all the items above when weather, labor shortages, high land costs, and so on work to reduce both the quantity and quality of the hay you have for sale.  This paper is designed to help you consider some of the major issues in developing a hay enterprise and to target those of you who are looking to diversify or add another part-time enterprise to your farm operation.  If you plan to make hay sales the major/full-time enterprise of your farm business, you should develop a detailed business plan. 

Know Your Cost-of-Production

My uncle was quoted saying, “that guy could sell snowballs to Eskimos,” about someone he knew.  The obvious implication was that the man was a salesman and could find a way to convince a customer that his product, snow, regardless of it abundance, had special characteristics and the customer must buy this product.  Even the best salesperson cannot overcome the problem of costs.  The best marketing and pricing strategies and the ultimate customer service will eventually fail if you do not know and control your cost of production and price your product accordingly.  Bankrupt airlines, booksellers, and banks are excellent examples.  

Cost of production starts with a sound production and financial record keeping system.  To determine the costs per ton of hay, you need to know the yield and costs.  Knowing yield sounds simple, yet keeping accurate yield records requires that hay from each field be recorded and that you weigh loads or estimate weights.  Consider ways to weigh wagons.  If you live near a site with truck scales, weigh a few sample loads and use the results to better estimate yields.  Consider purchasing a set of portable scales (less $2,500) that you can use to weigh all hay crops.  A side benefit of accurate yields is that you can document nutrient removal for your nutrient management plan.  Producing just small rectangular bales requires more labor, but with the aid of a bale counter you know how many bales you’ve produced and can weigh a random sample of say 5% (on small farm scales) to estimate the average bale weight.  You’d multiply the average weight times the bales per acre to give total tonnage.  

Acreage -- For fear of seemingly being out of touch, I ask this simple question.  “Do you know how many acres are in each field you farm?”  Production recommendation (fertilizer, pesticides, and seeding rates), cost, returns, and profitability measures are all based on the assumption that acreages are known.  So if you do not know your current acreages or if you are leasing a new farm make sure to measure the acreage.  Then use these acreages to determine yield, costs, returns, and profit per acre for each field and for the farm’s hay enterprise.  

Defining a few words and explaining how they are used when making decisions will aid your understanding.

Fixed costs (also known as sunk costs) are items that do not vary with level of use.  The most common are 1) depreciation1, interest, taxes, and insurance on equipment and machinery; and 2) depreciation, insurance, taxes, and maintenance on buildings.  Fixed costs do not change with the level of use.  For example, if hay equipment is used on an additional 30 acres, the interest, taxes, or insurance charge do not change.  However, fixed cost measured on the basis or either per acre or per ton of hay harvested decreases as more hay is harvested.

Variable costs (also known as out-of-pocket costs) increase with use:  an increase in the tons of hay harvested will certainly result in more fuel consumed and higher repair costs.  If a farmer stops making hay altogether, variable costs will drop to near zero, but fixed costs will remain essentially unchanged.

1Depreciation in this document will refer to a reduction in value or obsolescence of an asset over time (not tax depreciation).

Long-run decisions are made based on all costs being covered; that is, the income from hay sales will exceed the fixed and variable costs of machinery and equipment, hay production, storage, labor, management, and return on investment.  These costs are important when you start a new venture requiring additional investments. 

Short-run decisions are made day-to-day, year-to-year to help improve the profitability or reduce the losses of an on-going venture.  Short-run decisions consider only variable costs:  as long as the income from hay sales are greater than the total variable costs to produce that hay, the farmer is better off continuing to produce hay.  What happens when the income from hay sales no longer cover the variable costs to produce that ton of hay?  Then the farm business has reached the “ shut down”or the “I quit” point.  This situation implies that continuing to produce hay will lead to insufficient funds to pay for fuel, labor, fertilize, and so on.  

The question that you should be able to answer after reading this article is, “Have I reached the ‘I quit’ point for nitrogen fertilized grass hay, given the current costs of fertilizer and fuel?” 

Man Versus the Machine

Many farmers would prefer to substitute machinery for labor as when you look at the adoption rate of large round balers over the last 30 years.  Yet almost all hay sold to the horse industry is in small bales.  This begs the question, “Do I have to hire and manage labor to put up hay?”  The answers are you could or you could use some of the bale automation systems.  There are three main classes of bale automation systems. 

  1. In-field bale pick-up systems that are PTO driven or self-propelled.  Bales are accumulated in a large stack (four or more tons) that are transported back to a barn or dropped in the field as a unit.  If the bale wagon is not used to dump the bales in the barn as a unit, the bales must be mechanically loaded using a hay grapple unit and hauled back to storage.  This equipment complement can cost from $55,000 to over $150,000 and may not be the best choice with small fields distributed over a large distance.  Due to costs, I choose not to discuss this system.
  2. Bale accumulators – this unit is towed behind the baler and catches each bale and assembles them into a small unit (less than 1,000 lbs).  The bale-unit is then discharged into the field for pick-up with a front-end loader attachment (grapple unit) and each unit is placed on a wagon for transport to storage.  The grapple unit is used to stack the hay in the barn.  Costs for grapple and accumulator range from $15,000 to $25,000.
  3. Bale accumulator/bander – this unit is also towed behind the baler and catches each bale consolidating the bales into a unit (18-21 bales about 1,000 lbs).  The unit is bound using metal bands, like bundles of 2x4’s at the lumber yard.  The bale unit is approximately 8' long x 4.5' tall x 3.5' wide.  Units are loaded and unloaded using a fork lift attachment for a front-end loader.  The units will fit in most 6 and 8 foot pickup beds making sales to end-consumers less time consuming.  Costs for the unit and fork lift attachment are around $80,000.

Do these types of investments make sense?  Push the pencil or spreadsheet to estimate annual costs and labor saving.

What Does It Cost to Grow Mixed-Hay and Alfalfa Hay?

Budgeting:  To answer the question, “What does it cost to grow mixed-hay and alfalfa hay?” some of the basics of budgeting must be explained.  The purpose of a budget is to list the annual qualities and prices of inputs involved in the production of hay.  The sum of the income items less total expense leaves an estimate of net income or returns to land, risk, and management.  Since the sales price is often the most variable, most budgets concentrate on the cost of inputs like fertilizer.  The breakdown of major budget categories and explanations are listed in Table 1.

Table 1.  Example Abbreviated Budget for 1 Acre
1. Gross Receipts = quality sold * price Bales of hay * $/ton (120 bales * $4.00/bale = $480)
2. Pre-Harvest Variable Costs Units of inputs * $/unit (150 lbs of N * $0.75/lb)
3. Harvest Variable Costs Fuel, Lubrication, and Repairs  per acre * $/ac ($65/ac * 1 ac)
4. Total Variable Costs  – sum of lines 2-3 Sum of all costs
5. Machinery Fixed Costs (Based On New Equipment Cost) Ownership costs per acre – prorated to over the typical life of the equipment
   (depreciation taxes, insurance, interest on investment)
6. Other Costs General Overhead Costs
7. Total Costs – sum of lines 4, 5, & 6
8. Projected Net Returns – line 1- line 7 Returns to land, risk, and management
Gross Receipts Gross receipts are the sales price of a bale or ton of hay times the estimated production units.  Hay sold into the equine industry will have to be marketed based on quality, so that hay from different fields may not have the same value and should be reflected as separate items or as an average price representation quality from poor to excellent (Table 2).  The yield should indicate long-term average yields, not just the best of the last 10 years. 
Table 2.  Example Gross Receipts for Mixed-Grass and Alfalfa Hay
 Mixed-Grass - 3 ton yieldAlfalfa - 5 ton yield
Gross ReceiptsUnitsYieldPriceTotalYieldPriceTotal
Lower  quality hayTon1.25$90.00$112.501.25$125.00$156.25
Higher quality hay sold in 50 lb balesBales70$5.00$350.00150$5.00$750.00
Total Receipts$462.50 $906.25
Average Receipts per ton$154.17 $181.25

Pre-harvest Variable Costs

The current budget estimates of pre-harvest variable costs for mixed-hay are shown in Table 3 and alfalfa in Table 4.  The level of complexity increases when you move to the pre-harvest costs.  In the case of hay, the cost of establishing the crop is more expensive than the year-to-year maintenance and needs to be prorated over the life of the crop.  Calculating establishment costs requires a separate budget (please see the Virginia Cooperative Extension web site for hay establishment budgets (www.pubs.ext.vt.edu/category/enterprise-budgets.html).  The total is prorated over seven years for grass hay and five years for alfalfa.  The remaining items are a listing of the estimated units of inputs like fertilizer, lime, herbicides, and so on, priced at rates that are reflective of 2011.  Most farmers use a line-of-credit to finance the needed cash flow in the spring before crops are sold in the summer and or fall.  The production interest charged on the line of credit is calculated on the total pre-harvest costs for six months at the going short term interest rate.  The total of these expenses yields the total pre-harvest expenses per acre, per ton, or per bale, depending on what units are used to measure production. 

Comparing Tables 3 and 4, the first item you should notice is the very high cost of fertilizer making the variable costs per ton for alfalfa ($50) less than mixed-hay ($91.38).  Normally, alfalfa hay would cost more to produce than mixed-hay.  Given the reversal in costs, many assumptions or commonly held beliefs no longer hold true with these major changes in prices of fertilizer inputs.  However, from a prospective of efficient management, the use of legumes in grass hays to provide adequate levels of nitrogen would drop the costs of grass hays to a level lower than alfalfa.  Producing mixed hay to reduce total costs versus pure grass or alfalfa may be a limiting factor in selling mixed hay to the equine industry.  The remainder of the pre-harvest costs for mixed-hay makes up a small proportion of the costs.  For alfalfa additional inputs, e.g. pesticides, herbicides, and higher levels of lime to maintain a higher soil Ph, are required to maintain a healthy and quality stand over the 5 year life. 

Table 3.  Mixed-hay Pre-harvest Variable Costs - Based on 3 ton yield from 2 cuts
Pre-Harvest Variable CostsUnitsPer AcrePrice $Total $
Prorated Establishment Cost7 yrs1.0037.6437.64
NitrogenLbs150.000.77115.50
PhosphateLbs51.000.7437.74
PotashLbs186.000.65120.90
Fertilizer ApplicationAcre1.007.257.25
Other CostsAcre1.0015.0015.00
Production Interest2Dollar Rate148.200.068.89
Total Pre-Harvest Costs342.92
Total Pre-Harvest Costs per Ton114.31
Total Pre-Harvest Costs per 50 lb Bale2.86
2Production interest is calculated on costs that are used prior to fall at the annual interest rate to reflect only 6 months of interest the total costs are divided in half.
Table 4. Alfalfa Hay Pre-harvest Variable Costs - Based on 5 ton yield from 4 cuts
Pre-Harvest Variable CostsUnitsPer AcrePrice $Total $
Prorated Establishment Cost5 yrs1.0083.4183.41
NitrogenLbs0.000.770.00
PhosphateLbs75.000.7455.50
PotashLbs300.000.65195.00
Fertilizer ApplicationAcre1.007.257.25
Lime proratedTon0.3342.5014.03
Pesticides & HerbicidesAcre1.0054.6154.61
Other CostsAcre1.0014.8914.89
Production Interest2Dollar Rate212.350.0612.74
Total Pre-Harvest Costs437.43
Total Pre-Harvest Costs per Ton87.49
Total Pre-Harvest Costs per 50 lb Bale2.19
2Production interest is calculated on costs that are used prior to fall at the annual interest rate to reflect only 6 months of interest the total costs are divided in half.

Harvest Fixed Costs

The first step in addressing the fixed costs is to select the harvest equipment.  Then the costs must be annualized over the life of each piece of equipment.  Calculating annual fixed costs for the machinery complements requires allocating those costs over the life of the farm machinery.  Allocation of fixed costs is accomplished by using the capital recovery method.  The capital recovery method sets up a payment schedule to fully recover the value of the machinery and interest on the investment over the life of the equipment.  Capital recovery is based on the assumption that when the machinery is worn-out or obsolete, enough money will be available to fully replace the machinery with equivalent but updated technology.  This paper is not intended to give you all the details of calculating all fixed costs, so check with your local extension office about machinery costs resources.  Contact me at groover@vt.edu if you would like a capital recovery form to help in calculating machinery fixed costs.  Table 5 shows the fixed harvest and total fixed costs for mixed-grass and alfalfa hay.

Table 5 provides a summary of the fixed and variable costs discussed in the previous sections.  Costs are based on current input prices and new machinery.  Used machinery may cut the total fixed costs as much as 40 percent.  Conversely; used machinery may increase annual repair costs.  As pointed out, alfalfa hay has lower total costs than mixed-hay in this example.  For mixed-hay, total costs are higher because of the higher fertilizer (mostly nitrogen) costs per ton of forage harvested.  Thus, with current prices and yields alfalfa is a more profitable crop over mixed hay.

Table 5.  Example Harvest and Fixed Costs for Mixed-Grass and Alfalfa Hay
Harvest CostsMixed-Grass - 3 ton yieldAlfalfa - 5 ton yield
Fuel and Lube21.3842.76
Repairs11.8623.72
Harvest labor38.8677.29
Twine5.258.75
Total Harvest Costs$77.35$152.52
Total Harvest Costs per ton$25.78$30.50
Total Variable Costs$382.63$589.95
Total Variable Costs per ton$127.54$117.99
Total Fixed Costs$65.91$125.28
Total Costs$448.54$715.23
Total Costs per ton$149.51$143.05
Returns to all budgeted costs13.97191.02

Estimating Labor Costs

An important factor for farmers selling small square bales is labor costs and availability.  Table 6 provides estimates of labor across the spectrum from round balers to hand labor.  The results in Table 6 point the labor savings you would have to help pay for the bale handling equipment.  For example, if you are currently hand harvesting hay and want to consider a bale bander, the savings per acre of mixed hay harvested is $70.20 ($90-$19.80).  Thus, if you harvested 100 acres annually you would have $7,020 per year to help cover the capital costs of owning the bander.  Is that true?  Well depends on what you pay your workers, if they are family, salary workers, etc.

Table 6.  Labor Costs Estimates*
 Round balerAccumulatorBale BanderHand labor
Harvest and storage hours per ton0.581.20.663.0
Labor costs $ per hour10.00
Total harvest labor costs per ton $5.812.006.630.00
Mixed-hay labor costs per acre based on 3 ton yield $17.436.0019.8090
Alfalfa labor costs per acre based on 5 ton yield $29.0060.0033.00150
*Labor usage estimates are driven by many factors and local conditions; for example, field size, experience, training, skills, and so on.  The values in this table are rough estimates derived from machinery time in field.

Know the Prevailing Market Price

The prevailing market price is a question not a fact.  You can say with a fair amount of certainty what market price of #2 yellow corn grain allows both buyers and sellers to gauge the market conditions and know the prevailing price.  Yet when you ask, “What’s the price of a ton of hay?” the certainty quickly diminishes.  Some regions have well established hay markets and some do not.  There is also the problem of Eastern hay markets not reporting prices based on established grades and standards.  In addition, hay is a bulky (specifically round bales) product that makes transportation costs by traditional methods higher than for grains.  In contrast, Great Plains and West have established markets for hay based on specific standards and hay packages (large square bales) that make transportation less costly.  Yet in the East, the cost of hay to either the buyer and/or seller is not clearly communicated.  The terminal or local market price reflects the long-run efficient cost on making a ton of hay.  Therefore, farmers cannot easily look on the internet and see both the local price and historical prices of hay and say, “I can grow hay for less than that” or the converse, “I cannot grow hay for that price.”  In both cases you are making choices based only on your knowledge of your own costs of producing a ton of hay.  To get an estimate of local hay prices, check all sources of information, e.g. newspapers, local feed dealers, local hay brokers, internet sales for large loads from the west, and so on.  The asking price may not be the sale price, so you’ll need to check as many sources as time permits.  Also, pay close attention to all the attributes that effect price and costs; for example, quality measures (relative feed value, crude protein, TDN, net energy, NDF/ADF), delivery charges or discount if picked up at the farm, who unloads, quantity for sale, payment requirements, cutting time 1st, 2nd, etc., bale packages (rectangular, square, or round), customer satisfaction policy, and priced by bale or ton.  When you sell hay, you are assuming all the functions of a commodity market.  That is, specific grades and standards regulated by a third party; for example, corn grain - 56 lb. bushes at 15.5 percent moisture with less than a specific percentage of foreign matter, broken kernels, and so on.  The current market structure for hay does not provide these services; therefore, as a hay seller, you must address many of these functions for your customer base.  Now you have an estimate of what the long-term costs are in your area, the break-even price.  If you cannot produce hay for less than this price, your hay enterprise will not make profit.  

Setting a Price3

Ok, you know your total cost of production and have estimated the prevailing market price for alfalfa hay at $5.00 per 50 lb. bale and you now want to know how you should price that hay.  The first step is to know your breakeven prices.  Total variable costs (fertilizer, repairs, fuel, etc) are $117.99 per ton (Table 5).  This amount defines your rock bottom price.  What does this mean?  This is the cash cost of producing that ton of hay.  Unless you can average more than $117.99 per ton, you are losing more money by growing hay rather than by letting the farm lie idle. 

What about the other costs--machinery and equipment and storage?  Both of these items are associated with capital investments and will be an expense to your farm business regardless of the enterprise.  In the long-run, you must cover these costs for the farm business to remain viable; however, in the short-run these fixed costs may or may not be paid each year.  The breakeven costs for all costs (fixed and variable) in this alfalfa example must average more than $143.05 per ton or $2.87 per 50lb. bale.  This estimate is for hay at the farm.  Getting the hay to the customer (loading, transportation, marketing, phone calls, bad checks, collecting sales tax, etc.) will add to this cost. 

Produce What Your Customer Wants

The old adage in sales is “the customer is always right.”  Knowing your customer is the most important factor in marketing.  First, start local; do your homework on the type of hay wanted and in what form and quantities (weekly, monthly, annually).  Contact local horse owners who buy hay; contact smaller feed dealers and tack shops.  Ask if they are satisfied with their local supplier and what services are very important from a supplier; for example, monthly delivery and/or forage test results.  Analyze this information to determine if you can supply the hay and additional services and still cover your costs.   

The customer is always right is a good goal but is not always achievable.  In the horse business, timothy is the sought-after hay.  Many Mid-Atlantic farmers growing timothy have difficulty maintaining viable timothy stands compared to other forage crops like orchardgrass.  The result is simply that your costs of producing a ton of timothy hay will be greater than other hays.  Know your breakeven costs and other prevailing prices, then push the pencil to see if your breakeven timothy costs are greater than the prevailing prices.  This comparison should give you an estimate of net returns from timothy—at least on paper.  Do the same for other hays (orchardgrass, orchardgrass/clover, alfalfa) that might be somewhat less desirable than timothy.  Compare the estimated breakevens and net returns from all the hay crops, and choose the crop that will have the greatest potential net returns.  You must also consider the risk of failure or shorter stand life of each crop and discount your estimated breakeven costs to reflect that.  For example, if an orchardgrass stand averages a useful life of seven years on your farm and timothy may last only three years and the risk of an establishment failure for timothy is greater, you should think about increasing prorated establishment costs by 40 – 50 percent.  The final issue is to work with your customers to demonstrate that there is little to no difference between timothy and other hays grown locally.  This long-term educational effort may require discounting or the “try it and you might like it” approach.  The focus should be on service that meets the needs of your customers so that they are willing to forego the “timothy only” demands.

3Included in this article is an excerpt from chapter 8 of the 2006 publication, "Direct Answers for Direct Marketing.”  This paper provides an excellent discussion of pricing and breakeven pricing.

Establishing and Keeping a Sound Customer Base

Unlike other commodities, there is no structured market for hay.  If you do not create and maintain a customer base, it is unlikely that you will survive in the hay business.  Other than “the customer is always right,” the next major issue is to provide service to the customer.  Services need to be tailored to the individual customer and might range from individuals who buy only on price to individuals that want hay delivered only on Friday afternoons and stacked in the barn.  The real question is, “Can you find a way to meet each customer’s need without excessive cost?”  Ask your customers to comment on what’s important to them by sending them a thank you note and include a stamped postcard with a few questions that will help you understand their hay needs.  Depending on their technological adoption, consider using text messages, Tweets, Facebook, etc., as a means to follow up on the sale.  To create a client base, offer your current customers a discount on their next load if they help you get new customers near their farm.  Think creatively about how to meet your customers’ needs.

To meet the needs of your customers make sure you maintain a quality product and have documentation, which may include a forage test.  Be honest about the product and your policies and expect the same from your customers.  To make sure your customers understand your business practices, write them down and give them to all potential and new customers.  You will help reduce any misunderstandings.  In your business policy, also discuss how you would resolve problems of dissatisfaction with your hay or service.  It could be a simple statement that your customers have a right to inspect the hay at your farm, and once it is delivered full payment is required before unloading. 

Finally, “the customer is always right,” but you do not have to sell to them.  If you have a written statement of business practices, you can also have a statement of customer expectations.  A bounced check now requires full payment with interest in cash before you load the truck with the next load to that customer.

Summary

How much should I charge for a bale of hay?  First know your costs of production and charge accordingly.  Identify customers, know their needs, strive to meet the product quality and service required to keep and expand your customer base.

 

Rights


Virginia Cooperative Extension materials are available for public use, re-print, or citation without further permission, provided the use includes credit to the author and to Virginia Cooperative Extension, Virginia Tech, and Virginia State University.

Publisher

Issued in furtherance of Cooperative Extension work, Virginia Polytechnic Institute and State University, Virginia State University, and the U.S. Department of Agriculture cooperating. Alan L. Grant, Dean, College of Agriculture and Life Sciences; Edwin J. Jones, Director, Virginia Cooperative Extension, Virginia Tech, Blacksburg; Jewel E. Hairston, Administrator, 1890 Extension Program, Virginia State, Petersburg.

Date

December 9, 2011