Drought concerns pace forage market supply, demand outlook.

As with just about every sector of the economy, 2020 was a bumpy ride for the beef cattle and hay/forage markets. Heading into the 2021 growing season, analysts expect a generally smoother, less volatile marketplace for both. But drought conditions have overwintered in much of the U.S., and the lingering dryness is the single major challenge facing cow-calf producers and backgrounders, as well as the alfalfa hay/forage producers who provide them with critical feedstocks.

A gradual drawdown in U.S. cattle inventory was underway in early 2020 when the COVID-19 pandemic — a textbook “black swan” event — threw a wrench in the normal movement of the cattle cycle for much of the year. As the cycle returned to “normal” by the end of 2020, so did the slow reduction of inventory, which will likely cause a slight decline in overall demand in the forage market in 2021.

“Looking back over most of 2020, frankly, the beef market and demand were remarkably resilient,” according to Oklahoma State University Extension Livestock Economist Derrell Peel. “We’ve been in a sort of slow liquidation in the cattle industry. As seen in the data from the last two years, cattle numbers peaked in Jan. 1, 2019. They were lower at the beginning of 2020, and we started 2021 with slightly smaller numbers yet.”

The cattle cycle and what it means to alfalfa hay and other forage demand

This fairly quiet outlook for the cattle market for the next year will feature a slow .5% – 1% drawdown in inventory as a function of the overall cattle cycle, Peel said. The last year’s headline-grabbing events will remain fresh in the industry’s memory. But any potential similar disruptions are much less likely in 2021 given the resilience the supply chain demonstrated in 2020. That means the cattle cycle’s unimpeded move lower will slightly curb alfalfa hay and forage demand.

“We’re going into the year with just about the same number of cattle on feed as a year ago,” he said. “We have a pretty full pipeline for the next few months. As we work through those, we’ll see the market tighten up with fewer cattle being processed, a smaller calf crop and fewer cows. The supply of cattle is going to continue to tighten up and consistently slide lower on average, even if numbers do jump around a little bit.”

"We're going into the year with just about the same number of cattle on feed as a year ago," he said. "We have a pretty full pipeline for the next few months. As we work through those, we'll see the market tighten up with fewer cattle being processed"

“Hay supplies going into 2021 appear to be adequate even with a slight reduction in 2020 hay production numbers. Hay prices in late 2020 were slightly lower year over year for both alfalfa and other hay and are projected to average lower in 2021,” Peel said. “In part, the lower price projections reflect expectations of less total hay demand as cattle numbers decline in 2021. Regional hay market conditions vary considerably, and prices are higher than the national average in regions where drought is more severe. Persistent drought conditions may influence both hay demand and supply in 2021.”

Persisting drought concerns continue for the forage market

The drought will continue to be the major wild card that could buck the trend of gradually declining demand in the forage market through 2021 and into 2022. Supplies could quickly tighten early in the 2021 growing season, and thus increase demand, especially in regions the drought has been present the longest. As of the end of 2020, the U.S. Drought Monitor showed 41% of the U.S. was experiencing some level of drought, primarily in the western half of the country.

“If we were to see drought move eastward into Oklahoma, Kansas, Nebraska, Missouri and Arkansas, we could start to see big impacts on alfalfa hay and other hay production,” he said. “If the drought was to continue eastward as we get into the 2021 growing season, it’s going to be a big deal because it will start to bite into hay production in a way that’s more noticeable on a national level. We’re watching the drought very closely,” Peel said.

And that drought is largely driven by a La Niña system in the Pacific Ocean. But forecasters say that Pacific oscillation could transition to a more neutral phase by March or April, potentially opening the door to a gradual decline in drought conditions. Just don’t expect a quick rebound, if at all, through at least the first half of 2021, Peel said.

What the grain market wildcard means to hay supply/demand

On January 12, the USDA National Agricultural Statistics Service (NASS) released 2020 crop production numbers and grain stocks numbers that ignited a new rally in corn and soybean prices. Though preceded by an uptick in prices in the latter third of 2020, higher prices are likely to stick around through at least the first few months of 2021.

“Corn is closer to $5 than $6 per bushel. ‘King Corn’ doesn’t usually move in $1 increments, so I’m thinking it seems logical that we could stay at or below $5.50 for the next few months,” according to Grain Market Analyst Darin Newsom of Darin Newsom Analysis Inc. 

Increasing row crop prices could encourage producers to plant corn on acres previously occupied by alfalfa or other forage crops. But a trading range of $5.30 to $5.80 per bushel for corn and around $14 per bushel for soybeans will likely contribute more to acreage shifts between those two crops rather than overtake enough hay acres to cause any widespread changes in forage market prices. If the corn price goes beyond $6 per bushel, however, farmers could plant corn on forage acres. It’s a factor to watch for forage supplies moving into 2021, as any acres converted from forage to row crop production would cause a decline. But that’s far from a given heading into spring.

“Inverted cost-of-carry tables are telling us that both corn and soybeans need more planted acres in 2021,” Newsom added. “That isn’t likely going to happen as the trading prices are not there yet.”

Navigating the 2021 forage market will mean both haymakers and ranchers will need to keep an eye to the sky, especially in areas where drought conditions persisted through winter. Attention to growing conditions as winter breaks and the growing season begins will be a critical juncture; how the 2021 forage crop starts will go a long way to determining whether supplies will continue meeting local cattle producers’ forage demands or not.

“On the hay and forage side, local supply and demand will come down to weather,” Peel said. “Depending on what the weather does to us in 2021, that’s the only thing that could disrupt the trends underway heading into the year.”

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