C&B Notes

Hay is for Cattle

While the rise in corn prices has been widely reported, the drought in the Midwest has also wreaked havoc on the supply of hay.  Rising feed prices are expected to whipsaw beef prices — down at first as farmers prematurely flood the market with cattle they cannot feed, but up later when supplies are depleted — for quite a while.

The price of bales has more than doubled over the past year at auctions in states such as Iowa and Illinois, showing the impact of the severe Midwest drought on forage supplies.  Average US hay prices have reached record levels after increasing a more moderate 8 per cent on year.

The furious Midwest hay rally has gone largely unnoticed outside the cattle industry, as investors trade crops such as corn and wheat in Chicago’s futures exchanges.  But the rise is significant because it will push up meat and dairy prices as farmers shrink herds they cannot feed.  Hay supplies per animal are at the lowest level in more than 25 years, economists at the US Department of Agriculture said.

“My hay pile is going down in a hurry,” said Michael Cordia, who farms in Belgrade, Missouri.  “I’m going to have to sell my cows.”  Most cattle farmers would normally be grazing cattle at this time of year and mowing hay supplies for wintertime.  Midwest pastures are in very poor condition, however, forcing cattle to eat hay now.  The US faces its smallest hay harvest since 1976.

As an aside, we enjoyed this example of how a market tries to create competitive differentiation in what would seem like a purely commoditized market.  A lack of price transparency is a benefit to the most active and informed market participants.

“There is no uniform quality standard for hay.  The hay sellers like it that way.  They tend to wheel and deal in the marketplace,” said Stephen Barnhart, forage agronomist at Iowa State University.