Crops for hay understanding the local regional and export markets

Author: Colin Peace (JumbukAg Consulting) | Date: 23 Feb 2016

Background

Another poor growing season during 2015 in many cropping areas of Victoria (Vic) has given grain growers the opportunity to salvage some value from their crops by cutting them for hay. As the marketing of hay is dramatically different to grain and there are new risks involved, many growers have been reluctant to cut their crops for hay.

So that advisers and growers can approach this decision making process with more knowledge, this paper aims to provide some background to what can be an opaque topic, the hay market. Regional and export hay markets are discussed in terms of their specifications, price drivers and current and future supply and demand.

Discussion

Some hay growers say you need to be half mad to stay a hay grower but most also say that hay is often their most profitable cropping enterprise. While the production aspects are very similar to grain, cereal hay growers do require a working knowledge of livestock industries and their quality requirements.

The mechanics of the hay market

Due to its dense population of sheep and beef and dairy cattle, Victoria and south-eastern South Australia (SA) represent the highest hay production regions in the country. Victoria typically grows over 40 per cent of Australia’s hay and silage, but fodder in the form of hay and silage represents only a small portion of the total roughage needs for livestock.

Pastures provide the bulk of feed for ruminants and fodder is a supplementary feed. When droughts hit a broad range of grazing regions in Vic, the demand for hay can spike dramatically. The volatility of hay prices is also enhanced by how tightly growers retain their hay for on-farm use. Unlike grain, only 40 per cent of hay produced is typically sold each year.

Figure 1: Victorian fodder production by type.

Figure 1: Victorian fodder production by type.

If Victoria is flush with pasture hay, it is tough to sell cereal hay as pasture hay is dominant. The Australian Bureau of Statistics (ABS) census and survey data tell us that on average Victoria’s fodder production consists of 43 per cent pasture hay, 23 per cent cereal, 20 per cent silage (on a dry matter basis) and six per cent each for lucerne and other hay crops.

What happened in 2015?

The April to November growing season rainfall was low but we have had worse. The period 2006/07 saw historically high hay prices when decline 1 rainfall or less fell during the 2006 growing season throughout south-eastern Australia. Unfortunately for the irrigated dairy farms of northern Vic, this coincided with a collapse of water entitlements and an increase in the price of temporary irrigation water.

The hay market in early 2016 is $75 a tonne higher than 2013 but is still in line with the long-term drought inspired trend line price. The hay price has increased due to the relatively drier weather in the south in 2015.

This drier weather saw very little silage cut in south west Vic and greatly reduced areas and yields for pasture hay in all areas. Some conservative estimates which reduce area and yield of pasture hay, silage and other hay by 20 per cent, estimate Vic hay production at 2,150,000t, 850,000t lower than average. Some conservative estimates based on 15 per cent of the cereal crops being cut for hay in the Wimmera, Mallee and Loddon regions put an estimate of the additional cereal hay produced in 2015 at 630,000t.

With the hay stocks that remain on farm and the buyers that are waiting till the autumn break before buying their hay needs, it appears that hay prices will remain high, but nothing like 2006.

Figure 2:Victorian hay prices and irrigation water entitlements.

Figure 2: Victorian hay prices and irrigation water entitlements.

Hay buyers and quality

If livestock producers buy hay in proportion to their animal’s total intake, dairy farmers buy the most hay, followed by sheep farmers and beef producers.

Roughage, such as hay, is essential for ruminants and there are few substitutes when supplies are limited. If hay prices exceed $300 a tonne, some farmers turn to almond hulls but this is a reluctant choice for most.

The bulk of the hay trade occurs at baling but depending on the timing and scale of the autumn break, April and May can be another peak trading period for hay growers.

Figure: 3 Typical hay trade volumes.

Figure 3: Typical hay trade volumes.

Hay prices are volatile but no more so than wheat prices. Droughts often lead to spikes in prices and the droughts from 2002 to 2008 have changed the buying behaviour of many hay buyers. Hay price spikes have coincided with reduced irrigation entitlements and high water prices. Hay has been the greatest limiting factor for many dairy farmers during these dry times. Dairy farmers tend to be the most astute group of buyers, as their margins are tight and the optimum nutritional performance of their cows is paramount. Dairy farmers of the irrigated north in particular have tended to become both savvy buyers and more self-reliant for their hay needs by purchasing more land to grow their own hay.

The insecurity of supply and necessity to enter the market and haggle each year with sellers is shifting some buyers away from hay purchases and into more home grown fodder supplies. Dairy farmers tend to have the capacity to blend co-product feeds to create a ration and buy on the nutritional analysis of hay. Beef and sheep farmers tend to have less feed mixing equipment and are less driven by the quality attributes of hay on offer.

Cereal hay quality is heavily influenced by the time of cutting which is optimum at Zadoks Growth Stage 65 to 71.

Hay export

With many countries in north Asia and the Middle East striving for self-sufficiency in their dairy and beef production, the global trade of hay is expanding. This year, total traded hay is expected to be 50 per cent greater than in 2007. The global trade in hay is changing and new destinations have emerged in the past three years. Increasingly, countries aspire to retain self-sufficiency in dairy and beef production via imports of roughage feeds which countries are unable to grow themselves.

Australian hay exporters have worked hard to establish markets for oaten hay (which is the largest single hay commodity) traded. Japan remains the dominant buyer of hay for dairy and beef herds, however China and the United Arab Emirates (UAE) are now competitive buyers of lucerne and oaten hay.

The eight-hay export processing plants that buy cereal hay and straw in Vic and southern New South Wales (NSW) represent around a third of the processing capacity in Australia. Each has different buying grades and pricing scales, although there are some general similarities in the hay grades.

Table 1: General hay quality requirements for export markets.

Parameter High quality Low/Med Quality 2015 quality reported
Water Soluble Carbohydrates 15-25 % 5-15 % 25-35 %
Digestibility 60-65 % 55-60 % 65-70 %
ADF 30-35 % 35-40 %
NDF 50-55 % 55-60 % 47-50 %
Crude protein 4-8 % 4-8 % 9-11 %

Victoria and NSW export around 20 per cent of the hay with Western Australia (WA) exporting 45 per cent and SA 33 per cent. Japan has been underpinning the export hay demand since it began in the mid 1980s but is now a mature market and declining due to reducing profitability for dairy farmers in Japan.

South Korea has expanded its intake of Australian oaten hay and straw over the past 10 years. However, it has been the rapid expansion of hay demand from China which has captured the imagination of many in the trade.

Figure 4: Australian export hay by destination.

Figure 4: Australian export hay by destination.

Chinese hay demand

With 20 per cent of the world’s population and only 6 per cent of its arable land, China has strategically focused its own agriculture on production of human food, while animal feeds have been a target for import.

While Australia has 1.69 m dairy cows, China has around 15.6 m. The strong economic growth, a large young population, expanding middle class and Government sponsored school milk programs have increased the demand for dairy products in China. Chinese dairy consumption is only a third of the world average and has a large capacity to increase. China still produces half its milk from herds under 10 cows.

In 2008, melamine contamination of dairy feeds led to the death of six babies and caused illness in over 50,000 others. This triggered distrust of Chinese dairy products, a culling of around 15 per cent of the Chinese herd (mainly small herds) and expansion of dairy imports.

More recently, milk production reduced 5.7 per cent in 2013 and rebounded in 2014, creating a glut of milk in 2015. This oversupply of milk is expected to be cleared in the first half of 2016. Despite this glut of milk, the Chinese dairy industry continues to modernise with small herds exiting the industry and the large herds expanding. Chinese dairy producers are favoured by the demand for fresh milk, which represents over 80 per cent of total dairy demand.

These modern dairies are employing animal nutritionists and are increasing the per cow milk production. This favours demand for oaten hay. China now imports Australian oaten hay at a rate of around 150,000t/year. China does not import other cereal hay, cereal straw or lucerne from Australia although attempts are being made through the Australian Fodder Industry Association to gain access for these additional commodities.

Figure 5: Chinese imports of oaten hay and US alfalfa hay.

Figure 5: Chinese imports of oaten hay and US alfalfa hay.

Imports of Australian oaten hay are still dwarfed by imports of alfalfa or lucerne hay mainly from the United States (US), which sit at around 800,000t. The role of oaten hay has been to provide a palatable fibre to improve rumen function and balance the ration with US alfalfa.

Conclusion

If dry seasons persist, hay will continue to be an option for grain growers. Success can be improved with some awareness of the health of Victorian pasture production and the quality needs of hay buyers.

Export hay volumes are growing, particularly to China and South Korea. With forward planning and contracting, export oaten hay can be a valuable part of a cropping program if partnered with domestic sales.

Useful resources

Producing Quality Oaten Hay (Pamela Zwer, Mick Faulkner)

Contact details

Colin Peace
PO Box 4022, Balwyn, Vic, 3103
0413 835793
colin@jumbukag.com.au