The Benefits and Downfalls of Hay Supply Contracts

Kim Campbell MBA, M Eng Sc, BE,
Managing Director, Fodder King Limited

It has been impressive to witness the strong growth achieved by Australian dairy companies, particularly in export markets, by convincing customers as to the quality and value of our local dairy products. However, with this success comes the responsibility to deliver these products reliably and consistently in order to maintain market share and be in a position to increase those volumes. Customers, retail or wholesale, tend not to be particularly interested in the suppliers' problems: such as swings in production due to seasonal factors; or hardship that may be caused by drought. They just expect the product to be there when they need it, otherwise they will buy a substitute and maybe not return to the original product when it becomes available again.

1. Pasture and on-farm fodder conservation can limit performance

In an era of globilisation, when competing in tough international markets, a practice that should be questioned is Australia's heavy reliance on a pasture-based production system on the second driest continent on earth (after Antarctica). For a long time the main focus of Australia's dairy industry's production development strategy has been pre-occupied with getting more out of pasture based systems. It must be recognised that a lot of progress has been made in Australia with fodder conservation practices, including the use of silage and haylage. However, these practices ultimately limit the milk yield per cow because even the best quality pasture has low nutritional density as it contains about 70% water by weight. Silage has a higher nutritional density and milk production potential than pasture but this is also limited by a relatively high water content (45%-60%). Haylage, having an even higher nutritional density and milk production potential, is also ultimately limited by water content (35%-45%).

Unfortunately, even a relatively short period of dry weather for one to two months can impact milk production in a rain-fed pasture based system. Drought can negate a lot of hard work on incremental improvements to pasture systems, whether rain-fed or irrigated. It is worth noting that over the last 30 years, for more than 80% of the time, some part of NSW has been drought declared. Roughly the same story is true of the rest of Australia.

2. Hay can improve milk yield

One measure of Australia's likely long-term success could be average milk yield per cow. For Australia, this rose by 13% from 4,219 Kg/cow to 4,763 Kg/cow during the decade from 1991 to 2001 (the latest year that comparisons are available from the Australian Dairy Corporation). During the same period, the world average annual milk production rose by 28% up from 3,903 Kg/cow in 1991 to 4,981 Kg/cow in 2001. In 2001, twenty one countries were above the average, and sixteen below. Australia, ranked 23^rd, was below the average, with New Zealand ranked 28  ^th lagging behind on 3,700 kg/cow.

The six highest yielding countries in kilograms/cow were Canada (9,242), followed by USA (8,228), Sweden (7,980), South Korea (7,844), Netherlands (7,415) and Japan (7,400). There is not that much difference in the genetic potential of breeding stock in these countries. So, what makes these top countries successful at producing so much milk?

The answer lies largely in their feeding practices. Typically dairy farmers in these countries use a nutrient dense forage diet, somewhat like the following:

• hay   50 60% of diet

• corn, soyabean meal, minerals, salt, vitamins   40 50% of diet

According to studies carried out by dairy scientists at the University of Minnesota there appears to be a direct relationship between milk production volume and nutrient value of hay. The higher the feed value of the hay, the higher the volume of milk produced.

The hay predominantly used is lucerne and it forms the foundation for high milk production.

Does this make lucerne hay the perfect dairy feed?

The answer to this question is "nearly"! The hay must be of high nutritional value and be consistently available in large quantities to be a practical feeding option for dairy farmers. If it is not reliably available at the levels of nutrition necessary for high quality milk production then it is not the perfect dairy feed.

Assuming Australian dairy farmers can reliably obtain high quality hay, just how much production is possible? To answer this question studies by the University of Minnesota came up with the following performance figures, based on a diet of 50 60% lucerne hay.

Estimated Milk Production Limits
Relative to
Lucerne Hay Quality

Source: Conlin & Linn, University of Minnesota and Fodder King

The key to high milk production is high nutrient density of the feed and all of the feed must be utilisable by the cow.

Choice grade lucerne hay fulfills that requirement admirably, having high protein values (over 19%), high energy values (over 10 Mj/kg ME), high digestibility, high fibre, a good balance of vitamins and minerals such as calcium (>1.4%) and potassium (>2.5%).

The other factor which should be considered is feeding practicality. High quality lucerne hay is a good all round feed, requiring only simple supplements to ensure a balanced diet. It's simplicity as a feed, and it's ease of use make it the foundation diet for high milk production in the world's leading dairy countries.

3. Hay could make the difference

For Australian dairy farmers to maintain competitiveness in the world, they will not only have to improve incrementally but they may need to consider more radical solutions. Solutions such as feeding a significant quantity of hay as a regular part of their herd's diet and outsourcing the supply of hay to specialist hay producers.

Current pasture based systems are unable to provide cows with enough nutrients to support the high yields which are achievable. This phenomenon is especially true in early lactation as intake capacity at this time is below peak.

According to some dairy nutritionists, the daily consumption of two to four kilograms of lucerne hay per cow can greatly improve rumen fermentation, volatile acid production and microbial protein yield when supplied along with the grain portion and on-farm grown pastures and silages. This generally results in significantly higher milk yields.

Putting it simply, each kilogram of high quality lucerne hay (Prime grade or better), will deliver about 1 litre of milk. The better the hay, the more milk.

In high milk yield systems such as in Canada, USA and Japan daily dry matter intakes of up to 26 kg (at peak intake) are achieved, using 50 60% of quality lucerne and concentrate ingredients in the diet. High quality lucerne is used due to its high energy density (10 MJ ME/kg) combined with a crude protein content of about 20%. It's low moisture content allows for increased total diet dry matter whilst providing adequate fibre.

The potential benefits of a feeding strategy based on high quality hay that is supplied on contract are:

• The increased milk response from hay is virtually immediate.

• It provides a profitable means of substantially increasing herd yield and total farm milk production.

• It requires negligible capital outlay on the milk producer's part to switch to the new system.

• It could provide a platform for increased stocking rates and subsequent revenue and profit generation.

• It could take pressure off existing pasture systems and aid in long term sustainable land use.

• By enabling the dairy farmer to concentrate on producing milk, and not being a jack-of-all-trades contracted hay production could improve profitability and lifestyle.

• Delivery of quality hay could be based on just in time principles. This means milk suppliers' funds could be deployed for a virtually immediate result in milk yield rather than in potentially long term and lower yield investments such as in additional land, water, cows, irrigation and farm machinery.

High quality lucerne hay however is not always easy to obtain as many factors influence its quality and availability.

4. The hay industry is maturing

Perhaps you have bought hay in the past only to find out that it bears little resemblance to what was sold to you.

In the past buying hay was a little like a 'lucky dip'   buyers never really knew what they were buying. Problems included variable quality, inaccurate descriptions, no quality assurance, no clear market, and erratic prices - a generally confused market. As a result, the hay supply business has had the odd 'Arfur Dailey' taking advantage of the situation. This may have made some farmers wary and reluctant to rely on purchased lucerne as a part of their feeding programme.

However the industry is improving. The company, of which I am a director, was a founding member of the Australian Fodder Industry Association (AFIA) that formed in the 1990's. AFIA has introduced a national standard for hay to cover sampling, testing and product grades. The fodder industry is also becoming more professional with the emergence of specialist lucerne producers who guarantee product quality. This means that it will soon be possible to find enough consistent quality and competitively priced sources of lucerne to confidently incorporate it into your feeding programme and reap the benefits of it which the North American approach has identified.

New technology is also having an impact in the fodder industry by lowering the cost for monitoring the moisture of hay and testing its nutritional value. There is ongoing improvements in the technology for making and baling hay and for storing, handling and transporting it. 5. Improvements in hay production could aid dairy producers

For hay to be of high quality, great care needs to be taken during harvesting. The aim is to produce a product with the highest possible protein and energy content and digestibility and a moisture content that helps preserve these attributes. During harvesting, the crop must be cut at the optimum stage of growth, then it must be raked to aid in drying and then it must be baled at an optimum moisture content - which for lucerne hay is 18% moisture plus/minus 2% of moisture (16% to 20% moisture content). An ideal bale of lucerne hay would have a high leaf to stem ratio with the mass of leaf content roughly being equal to the mass of stem content. Protein and energy is concentrated in the leaf, whereas the stem contains most of the fibre.

After the crop is mown, the leaf dries out much more quickly than the stems. Hay farmers have traditionally mown then raked the hay, leaving it to over-dry (<16%) to ensure that the stems are dry, then relied on overnight dew to remoisten the leaves so that they are not brittle when baled. Usually hay can be baled for about an hour when the dew is settling and before the crop becomes too moist, and then it can be baled the next morning for about an hour when the dew is drying off. Thus, lucerne hay can usually be made in the just-right moisture content range for only one or two hours per day, at best.

Hay made too dry (<16% moisture) will be of inferior nutritional content because of loss of leaf due to leaf fracture.

Hay made too moist (>20%) is likely to go musty or mouldy and heat up from microbial action which in extreme cases causes spontaneous combustion. In my experience, because it has not been properly preserved, such mouldy hay can present the risk of botulism to some animals such as horses. Hay that has been made too moist and gone mouldy can be identified by its characteristic musty mouldy smell and the distinctive olivy-green dust that it gives off when handled and is usually discolored inside the bales as an indicator of degradation and heating.

Farmers can track the moisture content of hay they make, as it is being baled, by the use of readily available moisture probes.

There are some partial solutions that a farmer can employ to extend the time for baling. At his disposal are chemical and biological mould retardants which can enable the farmer to bale hay moister than 20% - say up to about 25% moisture - thereby giving him about an extra hour of harvest time per day. However the hay, so made, needs to be well ventilated to ensure that it dries in storage down to the just-right range for lucerne hay, by the time the mould retardant effect wears off.

There is a better solution to the hay moisture quandary. The company, of which I am a director, employs proprietary technology, developed by the directors, which enables the moisture content of hay to be controlled within the just-right range - enabling the mass-production of high-quality hay throughout the day; almost around the clock.

6. Hay purchasing strategies

Commercial scale hay users such as dairy farmers need a clear buying strategy   if they don't it will show up in their production figures.

Before choosing the right purchasing strategy when buying hay there are a number of issues that need to be considered. Prices vary significantly, depending on the time of year and the availability of hay. Freight is a substantial portion of the delivered cost. Just to complicate things further quality varies considerably within each type of hay and there are big differences in nutritional values between types of hay such as legumes and cereals. Different types of hay are made at different times of the year and there are many bale sizes and different bale formats to consider.

A buyer may take several approaches:

a) Spot Purchasing: Buying hay on the spot as and when you need it.

This approach can work well if the market is 'deep' with plenty of sellers, an abundance of hay and where hay quality is fairly uniform - a condition of 'perfect competition' rather like the situation in North America where hay is sometimes sold at auction.

The advantages of this approach are:

• Choice - There is plenty of hay to choose from.

• Price - It is possible to get a bargain.

• Flexibility - A commitment doesn't need to be made until the last minute.

However, these perfect market conditions have rarely existed in Australia. The buyer assumes responsibility for having the expertise to understand supply and demand as well as spending vast amounts of time sifting through the market place looking for that 'good deal'.

Disadvantages of this approach are:

• Study - Unless the buyer wants to rely just on luck, time will be required in monitoring the hay market.

• High search cost - It can take countless hours searching to find a good deal for the hay you need.

• Risk - Unless you spend the time to thoroughly inspect the hay you can still end up with a 'dud' load.

• Caveat emptor - Buyer beware. You only get what you see. Haystacks are rarely uniform in quality.

• Scarcity - The hay you are looking for may not be available at the time you need it.

• Uncertainty - It is difficult to budget because you don't know the price ahead of time.

b) Simple Contract:

A buyer and seller agree on a certain quantity of hay being supplied for a certain price.

This usually involves multiple deliveries over a relatively short period from an existing batch of hay.

The advantages of this approach are:

• Reduced search costs - No more hunting around for hay every time a load is needed.

• Reduced uncertainty - Some uncertainty is removed from the transaction because a price is agreed.

The disadvantages of such an approach are:

• Study - Considerable time will still be required in monitoring the hay market.

• Risk - Hay needs to be thoroughly inspected to avoid ending up with a 'dud' load.

• Caveat emptor - Buyer beware. You only get what you see. Haystacks are rarely uniform in quality.

• Availability - The hay you are looking for may not be available at the time you need it.

• Uncertainty -Budgeting is difficult because between batches you don't know the price ahead of time.

c) Big Shed Approach:

The buyer constructs a large storage shed/s to purchase in bulk and store surplus hay at the cheapest time/s of the year. For this approach, hay may be purchased on the spot market or purchased using a simple contract or a performance contract.

The advantages of this approach are:

• Price - A lot of apparently low priced hay can be purchased.

• Availability - The dairyman's needs for the year can be secured and placed under his direct control.

• More certainty - While stocks last, the price of the hay and therefore cost to the operation are known.

The disadvantages of this approach are:

• Capital Outlay - High cost of shed construction.

• Cash flow - Buying a lot of hay at once places an enormous strain on your financial resources.

• Risk - Hay needs to be thoroughly inspected to avoid ending up with adud' load.

• Caveat emptor - Buyer beware. You only get what you see. Haystacks are rarely uniform in quality.

• Product deterioration or fire - Hay made too moist can deteriorate in storage, heat and spontaneously ignite in extreme cases.

d) Performance Contract:

The Simple Contract is extended by placing a specification on the product to be provided, covering such things as: bale size and format, hay moisture, quality grade, nutritional tests and a vendor declaration (forms can be obtained from AFIA).

The advantages of this type of contract are:

• Uncertainty and Risk - Many of the uncertainties and risks associated with the Simple Contracts are reduced.

• Consistency - Using hay to supplement the herd's diet on a regular basis can enable more consistent rates of milk production around the year.

• Performance - Milk production can be maintained and monitored relative to hay availability and nutritional grade.

The disadvantages of this approach are:

• It reduces the number of potential buyers and the apparent available supply of hay.

• Time and diligence is required to ensure compliance.

e) Forward Purchase Contract:

An individually structured performance contract for future delivery, because an organised forward market for hay does not exist, unlike some commodities like grains and cotton, for example.

Such a contract would need to deal with hay related matters such as:

• the envisaged time period over which hay would be supplied or taken;

• specifying the quantity and quality of the product to be povided;

• bale size and format;

• hay moisture;

• hay quality grade,

• nutritional tests;

• testing procedures; and

• a vendor declaration (form can be obtained from AFIA).

It would also need to deal with business matters such as:

• forward payments;

• price schedule relative to quality;

• variations on price;

• variations on volume;

• payment terms;

• handling disputes;

• force majeur (acts of God).

The advantages of this type of contract are:

• Product risk is low.

• Greater certainty with cost control, budgeting and predicting milk yields and revenue.

The disadvantages of this approach are:

• Management time is required to find a suitable supplier, establish the contractual arrangements and to manage the contract once it is under way.

• Forward purchase contracts require a commitment from both sides.

• Overestimating demand, the buyer may end up with more hay than required.

• Time and effort needs to be allocated to managing the relationship with the supplier.

Each buying strategy has it's merits and shortcomings. Every dairy farmer will end up using at least one and possibly a number of these approaches. With increasing pressure on dairy farmers to specialise more, and concentrate their efforts towards greater milk volumes, I can see a trend emerging where greater reliance will be placed on purchasing feeds and supplements from specialist suppliers. Performance contracts or forward purchase contracts are probably the best way of enabling dairy farmers to maintain control over their production inputs.

7. Its quality that counts

It is widely accepted that high quality hay can give excellent milk yields. For example, in most dairies in the United States a diet containing about 50% high quality lucerne hay results in average milk yields of 8 10,000 litres per lactation year compared with typical pasture based results of just over 4,000 litres here in Australia.

We all know what high quality hay is capable of doing for our production figures, but just exactly what is high quality hay?

In a nutshell, it can be defined simply as dried out pasture, which displays the following characteristics:

• It is dry. It has a maximum of 19% moisture content but stores better for long periods at 12 16%.

Hay is like blotting paper and easily takes up moisture, particularly when it is stored in our traditional eastern seaboard milk production areas. To be useful for milk production it must be capable of storage for long periods without losses occurring due to high moisture content introduced during harvesting.

• It is highly digestible. This enables maximum take-up by lactating cows for minimal effort on the cow's part. It is preferable to have Acid Detergent Fibre (ADF) values below 40%.

• It has a high nutrient content, where the nutrients are well balanced, so that when consumed it results in high volume, high quality milk. The simplest measures are Crude Protein and Metabolisable Energy. For best results Crude protein should exceed16% and Metabolisable Energy should exceed 9.5 Megajoules per kilogram of hay.

So, which types of hay demonstrate these quality characteristics?

For milk production the legumes (eg Lucerne, Clover) contain the best combination of digestibility and high nutrition.

It is essential for hay buyers and sellers to work to a common grading system to make transactions as simple and efficient as possible.

The company of which I am a director has long adopted the grading system for lucerne (there is a similar system for clover and cereal hay) in Table 2 below. The Fodder King system combines the descriptions of each grade along with the range of Crude Protein, Energy and Digestible Dry Matter associated with each grade. Clearly the best hay to use for high milk production is Choice and Prime. The relationship between this system and the standard later adopted by AFIA is shown in Table 1 below.

Table 1

Table 2

Lucerne grading system developed by Fodder King Limited

8. Hay - how can you tell if it's a good deal?

Picture yourself in the following situation. Two hay suppliers have contacted you to offer you a great deal on "some really good lucerne hay". One supplier is quoting $260/tonne delivered and the other is quoting $200/tonne. Let's call them Deal A and Deal B respectively.

Is the choice really as obvious as it seems, that Deal B is clearly better?

As a professional dairy farmer the name of the game is to produce efficiently and profitably. If that's the case, descriptions like "really good lucerne hay" don't tell us anything about the hay's capacity to produce milk   do they?

So, how do we tell which is the better deal?

Believe it or not it's a simple problem to solve. All you have to do is ask the right questions to begin with.

Step 1 - Ask the right questions

The Right Questions

Now we can work out the true costs of the two deals by taking the following steps:

Step 2   Calculate the Dry Matter Price (DM)

In order to make a true comparison of the deals we have to calculate the Dry Matter Price. This simply means adjusting the price to account for the different levels of moisture content between the two deals.

Taking Deal A, the moisture content is 14%. This means that only 86% (100% minus 14% = 86%) of the hay is actually dry matter.

To calculate the dry matter price change 86% to a decimal (ie 86% = 0.86) and then divide the quoted price by 0.86 as follows: Deal A Dry Matter Price = $260/0.86 or  $302.33/tonne DM

Now, doing the same for Deal B, the moisture content is 19%. Therefore 81% (100% minus 19% = 81%) of the hay is dry matter. So if we follow the same logic as above: Deal B Dry Matter Price = $200/0.81 or  $246.91/tonne DM.

At this stage Deal B still looks like an odds-on favourite!

Step 3   Calculate the cost of Crude Protein

In Deal A 20% of the hay (by weight) is crude protein and is costing $302.33/tonne on a Dry Matter basis. This means that for each tonne of hay (DM) 20% or 200 kilograms is protein. If we are paying $302.33 to get 200kg of protein then each kilogram of protein is $302.33/200kg costing $1.51/kg.

For Deal B only 14% of the hay is crude protein and is costing $246.91/tonne on a Dry Matter basis to buy 140 kilograms of protein. The protein is $246.91/140kg costing $1.76/kg.

Step 4   Calculate the cost of energy

For Deal A we are paying $302.33 to get 10.5 units of energy. Therefore each unit of energy is $302.33/10.5 costing $28.79.

For Deal B we are paying $246.91 to get 8 units of energy. Therefore each unit of energy is $246.91/8 costing $30.86.

Step 5 - The decision

Now it's decision time! Which do you think is the better deal?

Let's start by summarising what we have calculated:

	Deal A	Deal B
Quoted price per tonne	$260	$200
Dry matter price	$302.33	$246.91
Cost of Crude Protein per kg	$1.51	$1.76
Cost of Energy Units	$28.79	$30.86

The quoted price and even the dry matter price clearly favour Deal B. However when the cost of protein and energy units are taken into account, Deal A would have been the right choice to make.

Should such a result be so surprising? What it is demonstrating to us is that buying good quality, high nutritional content hay is the most cost efficient way to produce milk.

9. Pooled Purchasing

Dairy farmers have purchasing power that they hardly ever put to effective use in the purchasing of important production inputs such as high quality hay.

The keys to better buying are:

• Buy against a clear product standard that is relevant to dairying. Be sure to specify the moisture content, protein and energy level you require   don't put up with the usual 'lucky dip' approach to hay buying.

• Purchase by the tonne not by the bale.

• Make the supplier responsible for their product. The best way to do this is to establish and agree on the terms and conditions of supply and have them written down - a basic performance contract may suffice.

• Form a buying group in your local area. Instead of everybody doing their own thing   some doing it well and others doing it badly   form a grouping of buyers so that your purchase volumes are much higher.

By doing that you may be able to negotiate volume discounts and better payment terms and conditions that you, as an individual, may never have been able to enjoy.

Large orders are easier for a specialist fodder supplier to service.

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