Valuation Measures for Forage Ross Pruitt, Department of Agricultural Economics and Agribusiness, LSU AgCenter
Valuation of any good can be a difficult proposition since there are at least two individuals trying to reach an agreement. There are two ways to start the process of valuing a good: cost-based and market based. With the ongoing drought in Louisiana, how much is too much to pay for a bale of hay? While every operation that produces hay will have different costs, knowing what it costs your operation to produce hay will be beneficial in the valuation process. These costs should include the variable cash costs as well as the fixed overhead costs due to the need to generate a high enough return to provide for replacement of equipment at obsolescence.
There are additional considerations with the cost based method of valuing a good. The first consideration is that higher quality hay costs more to produce. The previous statement is probably not a surprise, but additional inputs are needed to increase quality and those inputs are not free. Buyers can also expect to pay slightly more for hay whose nutritional value is known as information is not free either. Soil fertility can also vary causing difference in fertilization rates and therefore costs of production associated with purchased hay.
In normal circumstances, the cost based method and the market valuation approaches should be similar, but the drought situation and tight feedstuff supplies prevent the current situation from being “normal.” The cost to produce hay is below what it can be sold for given that alternative energy sources are in short supply. Tight supplies combined with increased demand for hay resulting from the drought is leading to the high prices currently seen. Buyers of hay may typically be confined to a few hundred miles for Louisiana producers, but the drought situation in Oklahoma and Texas (combined with here in Louisiana) has expanded the relevant market. As a result of the increased number of potential buyers, there is additional support for higher Louisiana hay prices.
So what is too much to pay for hay? Paying top dollar for low quality hay is still not advisable, but it’s been clear since at least 2008, that a new cost structure for cow/calf producers was arriving. Now, the price for calves has caught up and/or surpassed the increases in cost of production. The drought is pushing back the date as to when herd rebuilding will begin and increasing the length of time that prices will remain at historical highs, if not push higher. You may pay more than you are used to for hay, but you will also be paid more than you are used to for the cattle you are selling. As with most production issues, the question that must be asked is if your costs of purchasing hay will be less than the price received from selling cattle.