The complexion of midwest dairying is rapidly changing. The typical dairy has been a single-family operation with crop; heifer and milking herd enterprises. Changes in technology and social values are causing a major restructuring of the dairy industry and increasing the amount of specialization. Large milking centers, custom heifer raisers and specialized crop farmers are emerging.
 
Contractual arrangements between crop farmers and dairymen to supply all or part of the dairy’s forage needs are increasing as dairy farms expand, because concurrent expansion of crop acres and cow numbers is not feasible. Without such agreements, additional land would need to be rented or purchased. This would require increased capital, input expenses and demands on time and labor for producing crops. Long-term agreements can help solve this concern, plus they can provide a consistent market for the croppers product and a guaranteed supply of quality forage to the dairy, at a price that insures long term profitability to each party.
 
Traditionally forage has normally been marketed as hay, because of its storage and transportation advantages, although haylage and corn silage are preferred for dairy cattle rations. Supplying the long-term forage needs of the dairy by a local crop farmer makes good business sense, but offers some unique challenges.
 

 Wisconsin hay prices vary greatly from year to year based on supply and demand. Years with wide spread drought cause hay prices to escalate dramatically. The average all hay prices for the last ten years, as reported by the Wisconsin Agricultural Statistics Service was $70. Table 1 shows the variation of hay prices for years 1986 to 1995.
 
 

 Minnesota and Wisconsin dairymen have paid premiums for higher quality tested alfalfa hay at hay auctions. An earlier summary of Wisconsin and Minnesota data showed a $.95 increase per ton of hay for each unit increase of relative feed value (RFV) between RFV’s of 100 and 150. This price differential seems to be somewhat consistent across states and across years. The average price changes depending on the amount of hay available, but the premium for higher quality remains constant.
 
Relative Feed Value (RFV) is an index used to compare the quality of forages relative to the feed value of full bloom alfalfa. It is based on Acid Detergent Fiber (ADF) and Neutral Detergent Fiber (NDF) forage sample test results and indicates the expected feed intake and energy available from the forage.
 
The Wisconsin Hay Auction average prices ($/ton) for 1985 to 1995 are shown in Table 2. The ten year average hay price of prime hay demanded an extra $27 per ton over #1 hay, whereas, #2 hay brought $29 less per ton.
 

The nutrient requirements of dairy animals depend on age, body size, reproductive status and level of milk production. Because of this, certain qualities of alfalfa forage are best suited for specific classes of dairy animals.
 
The following recommendation for matching hay forage quality to animal needs has been made:
 

Animal Type	Alfalfa Quality	RFV Desires
Calves 2-3 months	Very High	>140
Heifers 3-12 months	High	125-145
Heifers 12-18 months	Medium	115-130
Heifers 18-24 months	Low	100-115
Dry Cows	Low	100-115
Lactating Cows (early lactation)	Very High	>140
Lactating Cows (late lactation)	High	125-145

 
From this summary we see that forages with a RFV less than 125 can not be effectively used by the milking herd. It also indicates that multiple storage units should be available to allow the correct forage to be accessible for different animal groups.
 
Another part of the forage decision process is the level of corn silage and haylage that should be included in the ration of the dairy herd. Feeding trials generally demonstrate similar milk production from cows fed diets based on either corn or alfalfa silage, but use of a single forage source may require better herd management or at least different operating procedures to prevent adverse effects on cow health or milk production. Many people feel that use of at least 1/3 of each forage type helps reduce the risk of crop loss and any animal health concerns.
 
 

For the grower:

Unlike a land rental agreement, the landowner/grower is still given the opportunity to farm his/her land and earn a competitive return for labor and management. Additional yield quality and quantity can lead to increased returns. Corn silage is a logical crop to contract because the risk associated with it is a relatively low compared to other crops. Corn silage yields follow closely to that of grain and are less sensitive to conditions that impact plant maturity such as a late planting date, summer weather conditions, or an early fall frost. With a corn silage contract, the harvest price is know at the beginning and not subject to the volatility of the grain market. Since the crop is harvested earlier in the fall, additional time is provided for fall tillage.
 
For the dairy producer:

In areas where land for rent or sale is limited, a contractual agreement may offer the only alternative for meeting forage needs on acreage that is within a reasonable proximity to storage facilities. A forage contract also enables the dairy producer to acquire additional feed without expending time, labor, and machinery inputs during the planting and/or harvesting seasons when timeliness is critical. Knowing what will be paid for forages prior to the growing season can benefit enterprise budgeting.
 
 

For the grower:

Given that the grower is offered a competitive price, based on expected yield, there really are few disadvantages. Since the price is fixed, the grower will not be able to take advantage of unanticipated price increases between planting and harvest. This could be overcome if the contract was structured to float with local market prices. The grower must realize that if the contract is written so that price will float with the market, then there is also the risk of a price decline between planting and harvest. The major disadvantage of a buy-sell agreement is that the grower must build provisions into the agreement to insure payment is made in accordance with the contract terms. In essence the producer becomes an unsecured lender after the forage is delivered if it has not been paid for.
 
For the dairy producer:

Two primary disadvantages exist for the dairy producer. First, the dairy producer loses some control over the production of feeds in terms of planting, fertilizing and weed control. Secondly, there is the realization that renting bare cropland and being responsible for all production inputs will often result in cheaper feed being produced per ton than obtained through a contractual agreement.
 

The following discussion assumes the contract under consideration is for a multi-year period and the objective of both parties is to establish an equitable pricing system that has less variability than the open market. Using this philosophy the price of forages sold between participants would never be as high or as low as open market extremes, but would result in approximately the same average price.
 
Dr. Terry Howard, University of Wisconsin, has developed a computer program (FeedVal) which calculates the value of forage based on the market values of shelled corn, 44% soybean meal, feed limestone and dicalcium phosphate. Using this program alfalfa hay (100% Dry Matter and RFV = 125) has the following value ($/cwt DM):
 
 

This approach could be used at the beginning of each year to establish the base price to be paid for haylage that year. Corn and soybean meal futures prices would be a logical choice for the calculation. The actual payment price for the forages purchased would then be the base price, plus any adjustments for forage quality based on its RFV.
 
 A modified version of this technique has been successfully used by one large dairy producer to purchase haylage from a crop farmer. The dairy and crop producers started by agreeing upon a value of alfalfa hay in their area. Then the FeedVal corn and soybean prices was adjusted until the value of 85% Dry Matter, 125 RFV hay matched their agreed upon price for local hay. The settlement price for all haylage delivered then was calculated using the FeedVal program, the adjusted corn and soybean prices plus the dry matter content and the RFV of the product delivered.
 

 As dairy farms expand in terms of cow numbers, they tend to utilize a significant amount of corn silage. Corn silage is a crop that lends itself easily to a contractual arrangement with neighboring farm units. The basic premise of the corn silage contract between two producers is that an agreed upon price would be paid per ton of corn silage produced. The dairy producer offering the contract would most often be the party responsible for harvesting the crop.
 
 

The first important consideration is that a trusting dairy producer-grower relationship be formed and each party enters the contract in good faith. A written contract is binding and cannot be broken without mutual consent from both individuals. The dairy producer must be confident in the grower’s management skills to produce high yields of quality product. The grower must be sure that he or she will be paid in accordance with the contract terms from the standpoint of amount and time. A letter from the dairy producer’s credit institution reassuring the grower that payment has been budgeted in a line of credit or cash placed in escrow for payment for contracted corn silage, can be used to reduce the risk of non-payment.
 
The contract can be relatively simple but should include some general expectations in terms of seeding rate, planting date, fertilizer application and weed control. The dairy producer may want to stipulate the hybrid to be planted given the variation in silage performance.
 
 

The grower of the corn silage will need to realize a return equal to or greater than the alternative enterprise being considered. For this reason, full or partial crop enterprise budgets must be developed for both corn silage and the alternative crop to arrive at a competitive price for the corn silage. Agricultural Budget Calculation Software (ABCS) developed by Gary Frank, UW Extension Farm Management Specialist, can be used for this purpose. If the alternative crop is corn for grain, obviously the input costs would be identical unless a more expensive hybrid is selected for growing silage. In this case, the price paid for silage will have to be competitive with the expected return for grain minus the harvesting, storage, and marketing cost. To further understand this method, let’s take a look at an example:
 
Assume the alternative enterprise is growing corn for cash grain. The dairy producer will be doing the harvesting. First, determine a base price expected to be received for the cash corn. Assume $2.50 per bushel. From this price, subtract out costs that will not be incurred if corn silage is grown. This is done as follows:
 
 

Base Price:	$2.50\bu
Harvesting	$0.15*
Drying  (8 points @ 0.02/point)	$0.16*
Storage  (6 months) and handling	$-.15*
ADJUSTED NET PRICE	$2.04*

*NOTE: These figures are used as an example only. Each farm situation will be different and must be calculated accordingly.
 
 
Estimate a realistic yield level. In our example, let’s assume 140 bushels per acre resulting in a per acre return of $285.60 ($2.04 X 140). Also, assume that a premium corn silage hybrid will be grown at an additional cost of $20 per bag or $8.70 per acre (assumes 2.3 acres planted per bag). Consider that corn silage removes an additional 90 lbs. of potassium (as K₂O) from crop fields compared to corn for grain. Valued at $0.14 per pound, this amounts to an additional expense of $12.60 per acre. Add these additional costs to the expected per acre cash return for a total of about $307 (285.60 + 8.70 + 12.60). This is the amount per acre that should be expected from the contracted corn silage. The $307 divided by the expected corn silage yield (corrected to 65% moisture) results in the breakeven price needed for corn silage to match net returns from growing cash grain. If 20 tons per acre is expected, the break-even price needed would be $15.30 per ton.
 
 
 

Several producers have experience with corn silage buy-sell agreements. Table 4 shows the actual cost of corn silage for a 700-cow dairy during the 1997 crop year:
 

The price for corn silage agreed upon by the two contracting farm units must be based on a benchmark forage moisture content. In the situation where the dairy producer will do the harvesting, the risk is entirely upon him or her to harvest at the desired moisture level. The grower must receive the same gross payment regardless of whether the corn silage comes off the field at 70% or 60% moisture. Table 5 can be used to make adjustments in price for varying moisture levels once a set price for 65% moisture corn silage is agreed upon. For example, corn silage valued at $18.00 per ton (65% moisture) changes in value from $15.43 per ton if harvested at 70% moisture to $20.57 per ton if harvested at 60% moisture. The impact of moisture on pricing is too great to simply be disregarded.
 
If a situation exists where the grower will also do the harvesting, it is the grower’s responsibility to deliver a quality product. In this case, price discounts are established when whole plant moisture falls outside of an acceptable range.
 
Accurate moisture estimates must be made throughout the harvest process and should be done on a field by field basis. Samples can be taken and sent to any accredited forage-testing laboratory or done by the individuals using a gram scale and a microwave oven. Taking multiple samples on a field by field basis to insure an accurate estimate is very important.
 

In a contractual agreement where the grower is paid based on yield per acre, reasonably accurate estimates of yield are critical. To do this, some or all loads of silage should be weighed across a scale. In the case of corn silage, representative strips across a field can be measured and weighed to determine yield. Another alternative is to weigh representative loads, which can be relatively accurate if all loads are filled to about the same capacity.
 

The following details need to be considered when developing a buy-sell contract:

Contracted forage price should include the cost to grown, harvest, deliver and store the forage. Determination of which of these services will be provided by the seller must be determined and the price adjusted to reflect these services. Current trucking rates for hay delivery is $1.30/ton/loaded mile if 200 or more miles. Shorter trips are charged at a higher rate because of the time to load and unload. Local forage hauling rates normally are charged by the hour based on the trucks’ capacity.

Where will the silage be stored? Any fermentation and/or storage losses must be considered. Prices per ton of fermented feeds should be 5-15% higher that fresh cut forage delivered to your site.
 
High producing dairy cows can only utilize good quality forage. Hay or haylage with a RFV less than 125 should not be accepted. The only way to determine RFV is to sample and test the forage that is delivered. Since determination of RFV takes time, a visual screening technique, based on forage color, stem thickness and percentage of leaves, must be developed.
 
The moisture level of haylage can vary considerably. You must insure that it is not delivered too wet in the morning or too dry later in the day. Blending loads from different sources may help avoid this problem. Silage less than 30% DM has a risk of fermentation failure and over 50% DM may be difficult to get a good pack. Provisions may need to be included for failure to deliver product in correct moisture range. Since haylage delivered may have different moisture levels, payment should be made on a dry matter basis. Like corn silage, a method of determining %DM must be established
 
When haylage is received the amount and quality must be determined. Weighing each load or representative loads are logical options. If payment is based on forage quality the contract should specify how each load will be sampled, how samples will be taken, and who will pay for the analysis. Often a sample is taken from each load and placed in a container that may be sampled at the end of the day. Thorough mixing of the samples before selecting a test sample is recommended. Often two samples are taken each day so both the buyer and seller can have the product analyzed independently.
 
If manure disposal is a concern for the dairy, the buy-sell arrangement could include contractual arrangements for the forage seller to take manure. Determination of the manure value and hauling costs should be included.
 
Forage suppliers may only want to contract 60-70% of their normal yield to insure they can fill their contract. Provisions should be made for failure to deliver or delivery of extra amounts.

Since forage is harvested seasonally and since milk is produced over the complete year, it often is advisable to define a monthly feed payment plan to compliment milk income and crop expenses.
 

Contracting forages have proven to be very useful for both dairy and crop managers, especially in areas where land for sale or rent is scarce and time or labor resources are limited. The price paid for forages needs to be competitive with alternative crop enterprises. Accurate assessments of forage yield, quality and moisture are important to be fair to both the grower and dairy producer.
 

Certified Alfalfa Seed Council, Inc. Alfalfa for Dairy Animals publication.
 
Howard, W.T., 1991 FeedVal Complete Program, UW-Madison, Dairy Science Department
 
Rankin, Mike. 1997. Contracting Corn Silage Acres, UW-Extension-Fond du Lac County Crops and Soils Agent. Extension Publication.
 
Undersander, Daniel, 1997. Wisconsin Tested Hay Auction 1983-1995. UW-Madison-Extension Agronomist. Extension Publication.
 
Wisconsin Agricultural Statistics Services, 1996. Wisconsin Agricultural Statistics, 1996.
 
 
 

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