Hay prices may 'spike', even if cattle futures dip

Hold on to your hay. Prices of the fodder may "spike" thanks to the high prices of feed grains, even if in fact, especially if livestock values fall.

Hay prices have lagged other feed sources since the grains rally started last June, with official data showing prices of baled US alfalfa rising 17% since then to $136 a tonne.

This reflects a long-term trend, fuelled by the reduction in the US cattle herd, which has declined to its lowest levels since the late 1950s.

Hay values have risen some 60% since 1990, compared with a more than doubling in prices of feed grains, such as corn, which have found alternative industrial uses as sources of ingredients and biofuel.

Herd expansion?

However, hay prices may play some catch up, if rises in cattle prices to a record high earlier this month encourage cow-calf producers to attempt to raise their game, raising demand for quality fodder.

"It is important to keep in mind that for cow-calf producers, no expansion will take place unless they have enough grass on their pastures to feed an expanding herd and there is enough hay availability to cover their needs over the winter," a report from Paragon Economics and Steiner Consulting said.

Yet supplies face a double whammy, first from a lower area allocated to the crop, as farmers plough up alfalfa to make way for the likes of corn, which set a record price last week in Chicago.

The US Department of Agriculture forecasts America's hay area falling by nearly 900,000 acres to a 17-year low just below 58m acres, the fourth-lowest figure on record.

'Running low on hay'

Secondly, dry weather in the southern Plains, where one-third of the US cattle herd are stationed, could lower hay quality as well as increase demand for fodder.

USDA officials on Monday highlighted that in Oklahoma, one of the biggest cattle states, the dire condition of pasture, of which 59% was rated "poor" or "very poor", had prompted a switch to alternative feed and meant "producers are running low on hay".

Paragon Economics and Steiner Consulting said: "Drought in the southern Plains is a significant concern going into the summer. If there is not enough moisture now, how will those pastures be in July and August?"

'Spike in values'

While it is possible that a decline in cattle prices, which some analysts believe have passed a seasonal peak and set in for a falling trend, by decrease the enthusiasm of breeders for maximising calf production, that may not prevent hay values falling thanks to a knock-on effect from feedlot dynamics.

Feedlots have been hoovering up available supplies of feeder cattle to fatten on grain-based diet, reducing the number of animals relying on other fodder sources.

Indeed, this dynamic, which is expected to see USDA data on Thursday show a rise of 6-8% in livestock placements on feedlots last month, has been a big factor in curbing the rise in hay prices.

"If cattle prices stall, however, the situation could reverse and we could see a spike in hay values," Paragon and Steiner said.

In hedge fund terms, alfalfa prices would gain a bit of alpha.

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