I would look again at round balers, the reason they have become popular is that they are so much less labor-intensive. Round bales are also more weather resistant, so you have more leeway in getting them put away. Small square bales only make sense if you don't have the ability to feed round bales.
I also have a 35 hp tractor, and I spent some time looking at round balers, there are a bunch that make bales in the 500 pound range that require less than 35 HP. The bale is going to be about 4x4. Here's the list of models I came up with:
New idea 6343
Challenger rb34
Hesston 530
International 8420
Hesston 730
New idea 6243
Massey 1734
Hesston 5530
Krone KR 125, 130
Krone KR 100
(A lot of these are rebadging or renumbering of the same basic baler).
A couple that take 40 HP:
New Holland BR 730
Deere 330
Regardless of the technology, this is going to be a big job for a small tractor. I get a little under 5,000 lbs of hay per acre, if you've got 20 acres that's 100,000 lbs of hay that needs to be moved, one way or another. Your tractor is about 3,500 lbs, how much weight do you feel you can safely control? Would you feel comfortable going down a hill with a wagon that outweighs the tractor? Where ever you decide your limit is, it's going to be a lot of trips.