By Jeff Osborne/Northwest Farm Credit Services
Hay prices have the potential to increase significantly in 2013, but the outlook is unclear. Drivers most impacting the market in the Northwest include: 1) Weather: First cutting alfalfa has been challenging in the Northwest with untimely and frequent rains. Crop damage has been widespread across the region, including Washington, Oregon and Idaho. Damage is most severe in the Columbia Basin. 2) Irrigation water shortages: Despite the wet conditions, growers in Oregon’s Klamath Basin and Southwestern Idaho face early shut-off of irrigation water. 3) Tight hay supplies: Old crop hay supplies in the Northwest were at near-record lows ahead of first cutting. Quality alfalfa is in particularly short supply. This situation is likely to find limited improvement this season, given early season production challenges and limited acreage increases. 4) Variable demand: Limited hay supplies are expected to establish a solid price floor in the hay market, but uncertainty with Northwest export demand and dairy industry profitability have the potential to limit hay price increases.
Local Markets
In the Washington-Oregon Columbia Basin, first cutting alfalfa is complete with some growers working on second cutting. Hay harvest and trade slowed significantly in June due to persisting rains. Rain damage is extensive and impacted nearly all of the area’s first cutting. Second cutting delays continued into the final week of June with some alfalfa at risk of becoming over-mature.
At the end of June, the price for premium quality alfalfa ranged between $215 and $225 per ton at the stack, compared to $210 at the end of March. The ongoing shortage of high quality alfalfa in the Columbia Basin – due to early season rains the past three seasons – has only provided limited price support so far this season. Exporters have shown limited interest in Columbia Basin alfalfa so far. Prices were $240 per ton for premium export hay one year ago. Depending on the extent of rain damage, good quality alfalfa sold for $190 to $215 at the stack, while feeder quality sold for $165 to $175 per ton. Those prices are similar to year ago levels. Timothy hay is in high demand again this year, but severe rain damage in the Columbia Basin and Kittitas Valley will limit the availability of higher grades of timothy. Prices for premium timothy are between $270 and $325 per ton based on market and bale size. That compares to $250 to $320 per ton last year.
In Idaho, growers are more than 75 percent finished with first cutting. Cool weather during the initial harvest slowed curing and put producers behind schedule. The majority of the crop was baled in good condition, but alfalfa still on the ground at the end of June was impacted by rain.
Idaho’s alfalfa market is showing strong demand and prices given tight supplies and the expectation of irrigation water shortages (especially in southwestern Idaho). Dairy buyers have been active in the market, with purchases supported by improved profitability. At the end of June, supreme quality alfalfa sold for $240 per ton at the stack, and premium alfalfa sold for between $225 and $235. Premium quality alfalfa prices have improved by approximately $25 per ton since the end of last quarter. Good alfalfa sold for $215 to $220 at the stack. Feeder quality hay sold $190 to $200, similar to prices experienced over the past six months.
In Oregon’s Klamath Basin, first cutting is nearly complete, with approximately 50 to 60 percent of baled without rain damage. Producers generally report good quality, but mixed yields with some light crops due to frost earlier this season. The early market is slower than many expected, but with some interest from exporters and dairies. Prices for premium to supreme quality alfalfa range between $220 and $230 at the stack. That is up from $205 and $215 for old crop last quarter, but down from $250 for alfalfa last June. There were no confirmed sales of feeder quality hay to report at the end of June; however, demand for feeder hay is expected up this year. The area is struggling with drought. Upper Klamath Basin hay growers may see lower production due to irrigation water cuts. Irrigation water is already being shutoff to thousands of acres of irrigated pasture. Local ranchers are expected to supplement lost pasture with hay.
Montana hay growers have seen significant improvement in dryland crops due to recent rains. The USDA Market News reports that there were no confirmed sales of hay in Montana the week of June 16, but demand is good for all types of hay. Demand is reportedly best from out of state buyers, who are making offers near last year’s drought-driven prices. According to USDA National Agricultural Statistics Service (NASS), Montana alfalfa prices reached a peak of $170 per ton this March and averaged $140 per ton in 2012. In contrast statewide alfalfa prices averaged $98 per ton in 2011. Montana cattle producers have seen improved conditions for pasture and rangeland, but will likely seek additional feeder hay this year to assure adequate winter feed and begin rebuilding hay stocks.
Hay Supplies
Precipitation and Irrigation: Prevailing weather and the availability of irrigation water are impacting hay production in the Northwest and California in 2013. As detailed above, the Northwest saw widespread rain damage on first cutting hay, and limited irrigation water supplies will impact growers’ production decisions. Hay growers in areas with irrigation cuts are likely to take fewer cuttings this year. To compensate, growers are likely to focus on maximizing yields at the expense of quality. Given these factors, high quality hay is likely to remain in short supply throughout the season. Southwestern Idaho hay production is threatened by early conclusion to water deliveries. The Boise Project Board of Control, which supplies water to the Treasure Valley, announced a 53 percent cut in water allotments, with shutoff slated for the first part of September.
Access to irrigation water is a contentious issue in the Klamath Basin. Klamath Falls hay growers expect they’ll have enough water to get through the end of summer by using a combination of ground idling, well pumping and other strategies. The number of alfalfa cuttings, though, will likely be limited to three versus four. The situation is particularly difficult for producers in the upper basin, where the Klamath Tribes and the U.S. Bureau of Reclamation exercised senior water rights, and shutoffs have already begun. Adjudication of the basin water rights was completed in March, confirming that the tribes have the most senior water rights in the upper basin. The March action reversed the situation that occurred during the 2001 drought. The bureau shut off irrigation to most of the project, but cattle ranchers in the upper basin still had water to irrigate.
California hay production has not been immune to weather challenges this season. USDA Market News reported that California experienced its seventh warmest spring on record. Alfalfa in California’s Central Valley is competing with permanent crops for limited irrigation water. Some growers have stopped irrigating alfalfa and have abandoned fields after limited cuttings. Producers in far Northern California experienced similar conditions to Oregon producers in Klamath Falls. Late June rains impacted hay production, while yields losses from a May frost are now being realized. Hot and dry conditions in Southern and Southeast California, coupled with strong winds have made bailing difficult.
Stocks: The May 10 USDA-NASS Crop Production report reveals that May 1 hay stocks in the Northwest were down 33.2 percent year-over-year, led by a significant decrease in Montana. California stocks rebounded above 2011 lows to near historical levels.
Acreage and Production Potential: Low stocks were met with limited acreage increases in the Northwest this year. According to the June 28 Acreage Report from the USDA, acres of hay for harvest in the Northwest are projected up 10.5 percent, led by a 22.7 percent increase in Montana. Hay acreage decreased an estimated 1.3 percent in Washington, and 2.0 percent in Oregon. Hay acreage is increased 6.7 percent in Idaho, while California is expected to see a 7.7 percent decline.
Based on production challenges, the Northwest and California aren’t likely to significantly rebuild hay stocks this year. The table below projects 2013 hay production using figures from the USDA Acreage Report and a three year average yield. Higher year-over-year yields shown might be achieved as hay growers attempt to maximize hay tonnage this year. Even if overall hay production increases, the market isn’t likely to find a surplus of high quality alfalfa or timothy.
Domestic and Export Situation
Beef Cattle: Although pasture conditions in most areas of Montana have improved, beef cattle producers are likely to seek additional hay to begin rebuilding stocks. Forage shortages and dry conditions continue to plague cattle ranchers in areas of Idaho and Oregon. Demand for feeder quality hay in affected regions is likely to receive a boost this summer. Extreme drought conditions persist throughout the mid-section of the country, including in South Dakota, Nebraska, Colorado, Kansas and Oklahoma, which may boost demand for Northwest hay.
Dairy: Demand for hay from Northwest dairies has increased. Milk prices improved during the first half of 2013, and most Northwest producers are profitable at this time. Interest in higher quality hay is evident in higher hay prices in Idaho. California dairies continue to experience weak profit margins, due to limited milk price increases and high feed costs. Markets for alternative feeds will also influence dairies’ decisions and ultimately hay prices in 2013. Corn prices fell following the USDA’s June 28 report on current corn stocks and production potential for the 2013 crop. Lower corn prices are likely to pressure hay prices down.
Exports: Northwest exporters have shown limited interest in Columbia Basin alfalfa so far this season. Aside from a lack of availability, export buyers are being cautious not to bid up the price of higher quality alfalfa given changing export market dynamics. The Northwest faces high shipping costs. Export business has shifted over the last few years to California, where costs are approximately $300 per container to ship hay from Los Angeles or Long Beach versus an average price of $1,000 per container to ship from Portland or Seattle. A rough estimate suggests that noncompetitive shipping costs place a $25 per ton premium on Northwest hay. Buyers in China and the United Arab Emirates (UAE), the two fastest growing hay export markets, are more sensitive to high prices than Japanese buyers have historically been. (Japanese buyers tend to place emphasis on hay quality. However, Japanese buyers are facing currency devaluation relative to the U.S. dollar that is beginning to make hay imports less affordable.) Given these factors, some Northwest exporters have positioned to take advantage of export market growth out of California by aligning with growers located in the Pacific Southwest or building facilities near Southern California ports.
According to data from the U.S. Department of Commerce, hay export market share continues to shift from the Northwest to California. Combined export volume for 2013 from California and the Northwest was down 0.7 percent year to date as of April, but exports from California ports were up 25.6 percent. Northwest exports are down 18.5 percent year to date. Referencing the graph below, California export volume outpaced the Northwest in February, March, and April.
Outlook
Tepid demand from exporters is limiting price increases for Washington hay, while increased demand from dairies is supporting strong alfalfa prices in Idaho. It appears increased export demand and short supplies in California are boosting hay prices in many areas of the state despite dairy industry struggles.
Tight supplies of high quality alfalfa and timothy have seen limited relief following first cutting in the Northwest. Between rain damage and irrigation water shortages overall hay supplies are likely to remain tight throughout the year. Looking ahead, there won’t be many new alfalfa stands planted in Southwestern Idaho and the Klamath Falls area this fall due to lack of water.
Limited supplies will help establish a fairly solid price floor in the hay market; however, buyers will likely remain cautious moving forward. Improved export demand for Northwest hay and continued profitability for Northwest dairies will support alfalfa price increases, but buyers in both segments will focus on keeping bids low. Lower hay prices will help Northwest exporters be more competitive with California, and lower feed costs will help dairies to weather potential milk price volatility.
Corn has been a favored substitute in feed rations, leaving alfalfa prices susceptible to changes in the corn market. Given the June reports from the USDA, corn prices should pressure hay prices lower.
Although break-even levels can vary significantly among regions and specific growers, alfalfa prices between $175 and $200 per ton will generally result in a strong return to most growers. While projected profit margins are attractive, the hay market remains risky given uncertainty in the dairy sector, limited growth in Northwest hay exports, and softness in the corn market.
For more information or to share your thoughts and opinions, please contact Jeff Osborne at 208-732-1034 or by email at [email protected].