You make an excellent case of not round baling any hay for sale to the public. The scenario you propose simply can't make money. Cows and horses still need to eat though, so something has to give.
Another reason why we round bale is to get hay off of the field quickly that can't be baled in a timely manner or has been rained on. The hay has to come off to get the next cutting ready and so it is marginal hay that gets sold at cost. Otherwise, we have to burn it. Hurts the bottom line big time though. We didn't factor that into our projections originally but we do now.
I will propose a financial model that I think works based upon personal experience and what I know about other hay operations close by.
Small squares at the volume level of 20,000 to 30,000 seems to be best way to make a living off of hay production in Indiana and the upper midwest. Charging between $6-$10 per bale depending upon quality with an average of $8.00 for 30,000 bales nets you $240,000. In indiana, particularly with all of the rains over the past few years, we are getting 80 bales per acre 1st cutting, 40 bales per acre second cutting, and a late 3rd cutting can get us 30 bales/acre. That gets us to 150/small squares per acre per year. You need 200+ acres to get to 30,000 small square bales. You aren't going to buy all of the land but you will rent probably 150 acres. Generally hay land will be smaller parcels that bigger farmers don't want to deal with so rents will be lower. $100 to $150/acre can be had. 150 acres at $125/acre average is $18,750 per year. No taxes to pay on that. You will need two people though full-time for 3 months. Usually one guy is retired and doesn't need high wages or health benefits and won't tear up equipment because he is in a hurry. We don't use any of those chemicals you mention because horse people don't want that. It is pure alfalfa or mostly alfalfa. I think your above costs are high in some areas and low in others. For 200 acres, it would be more like $15,000 for labor $10,000 for diesel, $2500 for prop and equipment insurance.and $25,000 for land costs. $52,500.00. You could add another $10,000 for chemicals and $10,000 for fertilize but that's for all 200 acres. Let's say you want to pay yourself $80,000.00. $240,000 gross revenue - $72,500.00 in expenses - $80,000 for a salary leaves $87,500 for expenses associated with selling/trucking the hay all winter long, marketing costs, storage costs, land loan, equipment loans, replanting alfalfa fields every 5 years or so, newer equipment, etc. You will chew up every dollar you make for something. You can still make money at 10,000 bales but you can't make a living off of it. I didn't include round baling custom fees or custom small square baling but that can add another $10,000 in revenue in above analysis.
This does imply an ideal year and that may not keep happening. That's why you need 300 acres most likely. In Texas to get these same yields, you may need 700+ acres, I don't know. Last time I was there, I saw nothing but brown grass and Round Bales for sale at $120 a bale. The small square financial model doesn't lose you money on every bale though. There are guys doing 30,000 bales on this forum too. I am not one of them but trying to get there. I can see the path though. We have a horse track nearby and that is definitely helping our business model. I am also hoping to tap into the Amish with some excess hay that the track doesn't take. This is where the regional aspects help out. Being close to both gives us a market that some don't have or can't truck the hay without being priced out of the market. If you only focus on hay, you only work really hard for 4 months out of the year. You will spend a day a week on average selling hay at 50 to 100 bales per load the rest of the year. You can stay busy as always. Leaves you free to get a walmart greeter job in the winter.
Guys that are buying Bale Barons at $90k aren't doing it to lose money on every bale they sell. Guys that buy triple tractor mounted mowers at $150k aren't buying them to lose money. They have figured it out. However, back to your point, round baling isn't why they buy that equipment. Small square baling is only feasible with automation and it has come about with the accumulators, grapples and tying systems like the Bale Baron. You can continue to round bale but it is just one of many tools that can and should be used as a wholistic hay business. You can't use it as your only tool for the reasons you mention above. There are probably guys on here that specialize in round baling and do make money and maybe they can speak up and explain how. I don't see it and neither do you.