Hay Cheaper to Ship to China Than California

By December 28, 2011 Uncategorized



There is something basically wrong when U.S. horses and cattle are starving because people can’t afford hay – but we can export it to China.


By Jeff Wilson
Bloomberg

U.S. hay, the country’s third-largest crop by value, is now cheaper to ship to China than to farmers in central California, compounding shortages that mean record prices for the dairy industry.

Ocean freight costs about $30 a short ton (0.91 metric tons) to send hay to Asia from Los Angeles, compared with $53 to truck the crop from southern California to the center of the state, according to Greg Braun, the president of Border Valley Trading LLC, a Brawley, California-based exporter. Prices for alfalfa, the most common variety, surged 62 percent in a year and reached a record $186 a ton in July, government data show.

Shipping lines hauling Asian goods to the U.S. are failing to fill boxes on the return journey, driving down costs for the containers used to carry bales of hay. That imbalance is contributing to the biggest U.S. trade deficit in almost three years and threatening earnings for dairies and cattle feedlots that the government had expected would help the U.S. agriculture industry generate record farm income of $94.7 billion this year.

“The hay and alfalfa shortage will get worse before it improves,” said Tom Barcellos, 56, who owns the 800-cow T-Bar Dairy in Porterville, California and farms 800 acres of hay. “So much of the hay is going into the export market that it takes hay away from California dairies.”

High-quality alfalfa hay fed to dairy cows in California, the biggest milk producer, cost $320 a ton last week, compared with $220 to $260 last year, Barcellos said. Corn is 63 percent more expensive than a year ago on the Chicago Board of Trade. Even after milk prices nearly doubled in two years, farmers are still spending 65 percent of the value of their output on feed. The ratio needs to be closer to 50 percent for them to be profitable, Barcellos said.

That highlights the divide in the U.S. agriculture industry as a surge in income for grain growers erodes earnings for livestock producers. U.S. dairy-farm income that more than tripled last year probably will drop 13 percent in 2011, the government estimates. Income for grain producers will jump 23 percent, after advancing 9.1 percent in 2010, as drought in Texas drives a surge in crop prices.

“There will be dairies going out a business if the drought spreads into the Midwest and drives corn prices higher,” Barcellos said. “There are probably 40 percent of the dairy producers that are still trying to regain equity they lost borrowing money in 2009 just to survive.”

The U.S. exported a record 3.22 million tons of hay valued at $825 million in 2010, and cargoes rose 11 percent in the first five months of this year, U.S. Department of Agriculture data show. About 80 percent of the crop was sent in containers last year, according to Newark, New Jersey-based PIERS UMB Global Trade, which compiles data on U.S. shipments.

An index reflecting charges for six types of containers fell 16 percent since the start of April, reflecting growth in the fleet and concern the global economic recovery is slowing, a gauge from the Hamburg Shipbrokers’ Association shows. The index is still 65 percent higher than at the end of 2008.

World trade will expand 6.7 percent next year, compared with 8.2 percent in 2011, the International Monetary Fund said in a June report. Container volumes will grow 8.8 percent in 2012, compared with 9 percent this year, according to London- based Clarkson Plc, the world’s largest shipbroker. About 90 percent of global trade moves by sea, the Round Table of International Shipping Associations estimates.

The jump in container rates spurred owners to order more vessels. The global fleet expanded 7.3 percent to 4,763 ships since the end of 2008, data from Redhill, England-based IHS Fairplay show. Orders at ship yards are equal to more than 27 percent of existing capacity.
Compounding Shortage

The export surge is compounding a hay shortage caused by the worst-ever drought in Texas, the biggest U.S. grower. The U.S. may harvest 57.605 million acres of hay in 2011, the fewest on records going back to 1909, after farmers planted more profitable crops, including corn, soybeans and wheat, USDA data show.

Farmers in Oklahoma and in Texas may reap one alfalfa and Bermuda-grass crop this year, compared with three normally, according to Larry Redmon, a forage specialist at Texas A&M University in College Station. Grass and hay account for about half of what cattle eat over their lifetime, with the rest coming from grains such as corn and wheat.

With the rally in alfalfa-hay prices, the cost of the commodity in southeast Asia is still 30 percent higher than a year ago, even with the lower freight expense and a weaker dollar, Border Vally Trading’s Braun said. That may curb demand, he said.

“Alfalfa exports started to slow down in June because buyers are searching for cheaper substitutes and signing shorter contracts,” Braun said. “Everybody is worried about buying inventory at these high prices.”

The competition from overseas buyers is unlikely to weaken any time soon. Anderson Hay & Grain Co. doubled hay exports in the past decade and expects to do the same again by 2020, said Mark Anderson, the president and chief executive officer of the company with processing plants in California, Washington and Oregon. That growth will come from Japan, South Korea, China and the Middle East, he said.

Chinese demand for U.S. hay will strengthen because the dairy industry is concentrating in the southeast and there is a lack of rail and road needed to bring in feed from other parts of the country, said Seth Hoyt, publisher of the Ione, California-based Hoyt Report, which covers the hay markets in western states.

Milk production in China almost tripled to 31.8 million tons in the past decade, the USDA estimates. It would have to expand about the same amount again to match output in the U.S., which has a population about a quarter of the size.

Combined U.S. farm exports rose 18 percent to an all-time high of $115.8 billion last year, led by a 34 percent surge in demand from China, now the biggest buyer. That’s not enough to stem the U.S. trade deficit, which widened 15 percent to $50.2 billion in May, the highest since October 2008, according to the U.S. Census Bureau.

President Barack Obama said in January 2010 he was setting a goal of doubling U.S. exports in five years, a target that would mean shipments reaching $3.14 trillion by 2015 from $1.57 trillion in 2009.

Global agricultural trade may exceed $1 trillion by 2020, from an estimated $700 billion in 2011, Michael Dwyer, the director of global policy analysis at the USDA, said last month. That will be driven in part by demand from expanding middle- class households, he said. Growth in such households outside the U.S. may double to about 1 billion by 2020, Dwyer said.

A key indicator for growth in hay exports is consumer incomes in countries that don’t have the land or water to grow their own crop, said Jeff Calaway, the president of Calaway Trading Inc. in Ellensburg, Washington. Hay exports accelerated once average incomes exceeded $15,000 in Japan and South Korea, in line with meat and dairy consumption, he said.

“When people get a little more affluent, they spend more money on improving their diets and dairy products make for a better meal,” Calaway said. “There are tremendous supply pressures from other crops that have reduced hay production.”

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