California dairymen are producing too much milk for the market, and once again have moved into a negative cash flow scenario as milk prices have fallen $2 to $3 per hundredweight from a year ago.
This prompted hay market analyst Seth Hoyt to lower his price estimate for first cutting, premium quality alfalfa hay moving into the Central California milkshed this season.
Hoyt of Ione, Calif., told a packed seminar room at World Ag Expo in February he has dropped projected first cutting fob premium hay prices $10 to $20 per ton for alfalfa from Imperial Valley, Central California, Nevada, Idaho and Utah from what he projected in December at the Western Alfalfa and Forage Conference in Las Vegas.
Hoyt dropped his projected prices despite the fact hay stocks are low and alfalfa hay acreage did not increase as much as an overheated hay market would typically warrant.
“Dairy is still the main driver of our (hay) market, and dairies are in a negative cash flow situation,” said Hoyt. 75 percent of the hay produced in California is sold into dairies; 65 percent for the seven Western states. 45 percent of the nation’s milk supply comes from the 7 Western states; 20 percent from California alone.
Dairymen in the Central California milkshed do not want to pay more than $300 per ton for premium, first cutting hay delivered to Central California, according to Hoyt.
The reason is the average February over base milk price is $14.75 per hundredweight versus 16.74 a year ago. In March of 2011 it was $17.31. This March it is projected to drop to $14.25. Hoyt speculated that the projected March milk price may be the low for the year.
Hoyt said it cost dairymen $15 to $16 per cwt on average to feed dairy cows. That is even high for dairies like those in the Chino area in Southern California which do not have much land to grow their own feed. In those areas, the cost of producing a hundredweight of milk could be as high as $17.
Hoyt cited a couple of recent sales that could serve as benchmarks for the year. A Central California dairy recently purchased a year’s supply of 4,500 tons of 55 TDN alfalfa from a western Nevada hay grower for $230 per ton fob. Another contract was signed for 7,000 tons of hay from the “eastern mountain” area of California for $245 per ton.
These two contracts will cost the dairymen $295 and $297 per ton respectively delivered Tulare.
Too much milk
Hoyt admits that hay growers may be perplexed at lowering prices in a short-supply market; however, growers need to put more weight on the demand side when pricing this year’s first cuttings because of the negative cash flow at the dairy.
“We are just producing too much milk,” Hoyt said, noting that one Pacific Northwest processor is now penalizing dairies which deliver over base milk. A similar situation occurred in California two years ago.
Dairymen have reacted to recent high alfalfa prices by feeding more silage and rolled corn and less alfalfa.
California dairymen were feeding milk cows an average of 8.6 pounds of alfafa per day in the third quarter of last year. In 2010 the average was 11.15 pounds per day.
Unlike last year when alfalfa replaced high price corn, corn could become more attractive than alfalfa as corn prices drop. “Some are estimating corn will be down to $5 per bushel in the next three to six months. This translates to $240 per ton for rolled corn (delivered Tulare) versus the current $282 per ton and the peak last year of $330 per ton,” he said.
The hay export market remains strong, but Hoyt noted that it still represents only about 15 percent of the West Coast hay market.
He cited Japan, United Arab Emirates, China and South Korea as the most robust export markets.
There has been “tremendous growth” in hay exports to China.
“China’s dairy market will grow. Nestles, the world’s largest food company, is really getting strong in China,” Hoyt noted.
“They are training Chinese dairymen on how to handle 500 cows rather than five or 10 cows. Nestle is also guaranteeing loans to China,” he added.
This bodes well for more hay moving from the West Coast to China.
“China wants to grow more alfalfa and agronomists have gone there to help. So far, however, they have not been successful in growing quality hay. With the Chinese infrastructure, it is easier to import hay than to grow it and move it around the country,” added Hoyt.
He also said the recently approved South Korean free trade agreement should bolster hay sales to that nation.