CATTLEFAX TRENDS

FEED COST OUTLOOK

Cow costs are expected to increase in 2021 for several different reasons. Many producers have already realized that projection is becoming a reality. One major factor for the increase in total costs is higher feedstuff prices. Hay and grain values started the year off above 2020 levels and are forecast to maintain this year-over-year trend for the remainder of 2021. As with any year, there will be significant regional differences not only between prices but also the degree of change compared to 2020.

To set the foundation for the fundamental discussion it is important to understand how much hay is available to begin the new market year, which starts on May 1. The USDA estimated the U.S. May 1 stocks for all hay at 18 million tons, down 2.4 million, or 12 percent, compared to 2020. Since 1990 there are only five years with tighter beginning supplies. The Southern Plains and Southwest regions experienced the biggest annual drop in May 1 stocks, with a reduction of 32 and 41 percent, respectively.

Not only does the country have smaller hay carryover, but 0.5 million fewer acres are expected to be harvested in 2021. According to the USDA Prospective Plantings report, producers intend to harvest 51.7 million acres for hay production. When looking back over the last twenty years it is not surprising to see a decline. Since the peak in 2002 at 63.9 million acres, a downtrend has developed for an average reduction of -0.7 million acres per year. Since 51.7 million was “intended”, the number of acres that are actually harvested this year can be larger or smaller. But history suggests, it will be tough to see anything above last year’s 52.2 million acres.

When thinking longer-term for the cow-calf industry, will the hay acreage trend continue? If grain prices remain elevated, there is risk more acres are converted for row crop production. Urbanization has already caused a loss of acres and could continue in the future. While these comments are currently just speculation, it is important to keep in mind how a continued decrease in hay acres would impact your operation in the next five to ten years.

Yield is the other variable that goes into the production equation. The five-year average is 2.44 tons per acre, while last year the U.S. yield for all hay types was 2.43. Obviously, yield is highly correlated to precipitation and snowmelt, just like any grazing pastures. To help predict yields, pasture ratings reported by the USDA on a weekly basis can be used. Using those varying pasture and rangeland conditions, CattleFax formulates regional and U.S. indexes, allowing for year-overyear comparisons. The 2021 U.S. pasture and range condition index had a terrible start to the May 1 marketing year. In fact, the worst on record going back to 1995. This does not bode well for a year-over-year increase in hay yields. There is a strong correlation of 0.77 between the annual average pasture condition index and hay yield over the last 20 years.

There are obvious differences in the pasture condition index between regions. The Southern Plains region has received some much-needed drought relief in recent weeks to improve the pasture index significantly after one of the worst starts. At the beginning of June, the index was even with the 5-year average. However, most areas west of the Rocky Mountains and the Dakotas are dealing with a drought. June 6th pasture indexes for the Northwest, Southwest, and Northern Plains were 31, 27, and 20 points below the 5-year average, respectively, on a scale of 1-100. It is likely regional hay price trends will reflect the variation in the pasture condition index. Corn is another important feedstuff for producers that has experienced a rally since last year. The demand side for corn is supportive to the market,

with strong exports and an increase in grinding for ethanol expected. All eyes are on this year’s planted acres and yield numbers to figure out if supply will keep up with demand. Mother Nature will need to provide timely rains, especially in the northern and western Corn Belt regions, to maximize yield. Nonetheless, everything is lining up that corn or corn products will be more expensive than 2020 for the remainder of the year.

There is a positive historical relationship between the corn and hay market. Since 2011, monthly spot corn futures and hay prices are moderately correlated at 0.51. While the connection is certainly not perfect, the anticipation of an elevated corn market is another variable that will likely support higher hay prices.

Through April, U.S. all hay prices averaged $7/ton above last year. However, the last two reported months were $10/ton higher at $166 and $171, respectively. Do not be surprised if the year-over-year increase remains close to $10 for most of 2021 for a U.S. average. Assuming a cow consumes 2 tons of hay per year, hay costs go up $20 per cow compared to last year. Unfortunately, with the drought in some regions, producers may not only have to feed more expensive hay but also larger quantities.

There are a few things producers can do to minimize the effects of high hay costs. Be strategic when it comes to procurement. Prices typically peak in late spring or early summer before drifting lower. As winter approaches and demand increases, prices seasonally trend higher. Look to purchase hay in late summer or fall when harvest is well under way and the market has more clarity on production levels. The odds favor hay prices will be near the annual lows if purchased out of the field. Other strategies include stockpiling grass for the winter to reduce the need for hay, if possible. Weaning early in the drought-stricken areas should stretch the grass to prolong feeding hay as long as possible. Bottom line, be prepared and have a plan for your operation to limit additional hay costs.

Coming into 2021, cow costs were projected to increase for multiple reasons. Inflationary pressure, energy expenses, and especially feed inputs were the main drivers. Corn and hay prices started the year higher, and producers need to understand there is risk that trend continues for the remainder of 2021 and into 2022. While calf prices are forecast to be higher this fall to help offset costs, it is important for operations to be proactive to minimize the increase in expenses and improve efficiencies, especially those dealing with drought conditions. The question is not whether feed costs increase this year, but rather by how much.