Factors Affecting Hay Supply and Demand in Tennessee

Understanding the interactions between supply and demand for hay is important because of hay’s significance to the agricultural sector and economy, and because hay is an important crop on highly erodible soils. As an example, Tennessee has the most erodible cultivated cropland in the United States (Denton, 2000), nearly half of the state’s current CRP acreage contracts are set to expire in 2007 (U.S. Department of Agriculture, 2006), and hay is one of the most economically important crops produced in the state (U.S. Department of Agriculture, 2004). Cross (1999) attributed the upward trend in Tennessee hay acreage since 1980 to an increasing number of farmers who were searching for alternative production activities, such as hay, pasture and livestock, to replace row crops on erodible soils (U.S. Congress, House of Representatives and Senate, 2002). Hay ranked tenth in value of receipts in Tennessee at $49.25 million in 2006 and cattle and calf production ranked first at $500 million. Hay ranked second in value of production at $262 million in 2003 and averaged $248 million over a five period from 2002 – 2006. Underscoring the importance of hay in Tennessee was the state’s national ranking of fourth in the production of other hay (excluding alfalfa) at 4.25 million tons in 2006 (U.S. Department of Agriculture, 2007). To quantify these supply and demand relationships, one must understand the characteristics of hay markets. Markets are usually localized because of the weight and bulky physical characteristics of hay. Although hay species are not identical, in many livestock production situations most are close substitutes, with the possible exception of alfalfa hay. In Tennessee, alfalfa is a differentiated hay product used mostly by dairy and equine producers. Nevertheless, alfalfa constituted only 2.5% of all hay produced in Tennessee in 2003 (U.S. Department of Agriculture, 2004) and its price tends to move proportionally with other hay prices; thus, for modeling purposes alfalfa and other hay can be aggregated as in Shumway’s (1983) study of Texas field crops and treated as a composite commodity (Nicholson, 2005) called hay. In 2002, 47,000 operations within the state produced forage, while on the demand side, 50,000 operations were involved in beef and dairy production with another 24,000 equine operations (U.S. Department of Agriculture, 2004). Despite the lack of national and state central markets for hay (Cross, 1999), buyers and sellers seem to be aware of the current prices in their area. Word of mouth, a hay directory website (Tennessee Farm Bureau Federation, 2005), and the Farm Facts bulletin (Tennessee Agricultural Statistics Service, 2004) are among the primary outlets for price discovery (Rawls, September 2004). Hay producers are typically assumed to be price takers (Shumway, 1983) because of the large numbers of sellers and buyers; nevertheless, search costs and price differentials can result from the lack of a central market. Even though hay and livestock producers have avenues for price determination in the short run, they have little information about what causes supply and demand for hay to change from year to year. The overall objective of this research was to illustrate how the understanding of hay markets can provide valuable information to hay and livestock producers and agricultural policymakers. Using the Tennessee hay market as an example, the specific objectives were to: 1) determine the factors that influence Tennessee hay supply and quantify their effects, 2) determine the factors that influence Tennessee hay demand and quantify their effects, and 3) briefly illustrate the importance of hay supply and demand information to policymakers. Estimating factors that influence hay supply and demand can help to provide hay and livestock producers with valuable information for making more informed business decisions and policymakers with insight into how proposed agricultural policies might affect hay and livestock producers. To accomplish the objectives, Tennessee hay supply and demand were modeled econometrically, and the coefficients of the models were used to quantify hay acreage, yield, and price responses to the factors that influence the Tennessee hay market. The results were then used to briefly illustrate the potential impacts on the 2008 Tennessee hay price from the retirement of Conservation Reserve Program (CRP) acreage in 2007. Hay acreage proved to be fairly unresponsive to output and input prices in both the short and long runs. The weak response of hay acreage to own and substitute crop prices may result from many hay producers also being cattle producers that harvest their own hay in an effort to guarantee a reliable supply of roughage to feed their herds throughout the winter months. They might be willing to give up potentially higher profits from a production alternative to avert the risk of feed shortages for their cattle. The hay price appeared to be responsive to real per capita income with a price flexibility of 1.55. This finding is reasonable because an increase in real per capita income results in more purchasing power for a typical household. As purchasing power increases, one would expect beef consumption to increase because beef is a normal good (Schroeder and Mark, 1999). Increased beef consumption would positively influence the derived demand for beef production inputs; hence, increased demand for hay. A weak response of hay price to the quantity of hay produced (HPRODt) could be explained by the hay market structure. First, some livestock farmers may produce large amounts of hay for their own livestock, much of which is not sold on the market. These farmers may be able to produce hay at a lower cost than market price, or they may be willing to forgo the potential cost savings from buying hay from an off-farm source to avert the risk of feed shortages for their cattle. Additionally, unlike the market for corn or cattle, the hay market is much less organized and structured. Farmers producing hay for the cash market have no nearby and convenient grain elevator or auction market at which to sell their product. Weak response to changes in hay quantity and price suggests that hay farmers may not be driven solely by the profit motive. Instead, other motives may also enter into their objective functions as utility maximizers.