Commodity Costs and Returns: Methods

Commodity Costs and Returns Features Data About the Estimates Methods Glossary

• Data Sources
• Structure of the Accounts
• Regions
• Estimating Costs and Returns

Data Sources

Data used to establish the cost and return estimates are based on producer surveys conducted about every 4-8 years for each commodity and updated each year with estimates of annual price, acreage, and production changes. Commodity-specific surveys as part of the annual Agricultural Resource Management Survey (ARMS) have been used to collect the data since 1996. There are multiple versions of the ARMS each year, including whole-farm and commodity production practice and cost versions. Each production practice and cost version gathers detailed information about input use, field operations, and production costs of a particular commodity. Field enumerators personally interview farmers using questionnaires developed by the National Agricultural Statistics Service (NASS) and ERS. The ARMS data collection starts during the fall when production practice and cost data are collected, and finishes in the spring when a follow-on interview collects data about whole-farm costs like overhead, interest, and taxes.

Each farm sampled in the ARMS represents a known number of farms with similar attributes so that weighting the data for each farm by the number of farms it represents provides a basis for calculating estimates for the target population. Target populations for the crop commodities include all farms producing one or more acre of the commodity. To qualify for the ARMS hog survey, operations had to have a minimum of 25 head during the survey year. A minimum of 10 cows milked were required for dairy operations, while cow-calf operations needed to have 20 beef cows to qualify.

The survey data used in estimates for years prior to the ARMS were collected as part of the annual Farm Costs and Returns Survey (FCRS) from 1984 to 1995, and the Costs of Production Survey (COPS) prior to 1984. The types of data currently collected in the ARMS are essentially the same as the data that were collected through the FCRS and the COPS, except that the FCRS and COPS surveys collected cost-of-production data and whole-farm financial data in one interview. Survey base years for estimates in the cost and return series are:

Estimates made prior to the first year listed were based on various surveys conducted in 1974-76. The 1982-83 survey was for all major crops, split into Southern States (1982) and Northern States (1983).

Since cost-of-production data for any particular commodity are only collected about every 4-8 years, estimates for non-survey years use the actual survey year as a base and use price indices and other indicators to reflect year-over-year changes. This can cause discontinuities when new survey data replace these non-survey estimates. The magnitude of these discontinuities depend on how much technical and/or structural change occurred in the sector between the survey years, as well as changes in the sampling, questionnaire, and other data collection procedures. The survey data are supplemented with price and production data from other sources, mainly NASS Agricultural Prices and Crop Production publications in order to develop the annual estimates during non-survey years.

Structure of the Accounts

Commodity costs and returns include estimates of both cash expenditures and noncash costs. Cash expenditures are incurred when factors of production are purchased or rented. Noncash costs occur when factors are owned. For example, if a farmer fully owns the land used to produce corn, he/she would have no expenditure for land rental or for loans to pay for the purchase of land. Yet, an economic cost arises. By owning the land and using it to grow corn, the farmer foregoes income from other uses of the land, such as renting it to another producer. These costs come about because production resources are limited and have alternative uses. If a farmer uses savings to pay for operating inputs, such as seed, fertilizer, chemicals, and fuel, and thus pays no interest on operating loans, the farmer still incurs an economic cost because the savings could have earned a return in another use. Likewise, the farmer has an opportunity cost of his/her labor used in the production of the commodity because it could have been used on another farm or in off-farm employment.

The cost and return accounts were categorized into cash and economic costs for all commodities from 1975 to 1994. Beginning in 1995, the accounts were revised to conform with methods recommended by the American Agricultural Economics Association Task Force on Commodity Costs and Returns. The Task force recommended that the cost and return account be divided into operating costs and allocated overhead costs. When a commodity was subsequently surveyed after 1995, this format has been used in the accounts (table of comparison between methods).

Regions

Beginning in 1995, the cost and return accounts have been reported using ERS Farm Resource Regions. This regional definition provides a consistent delineation across all of the commodities and attempts to classify farms into homogeneous resource and farm-type regions. Commodity accounts are reported only in the regions where enough survey observations are available to make a statistically reliable estimate. Some modifications are made to the regional delineation for situations where the production practices in different areas of a region differ to the extent that separate regions are warranted.

Prior to 1995, State boundaries were used to delineate regions for most commodities. States were grouped according to those with similar production practice and resource characteristics. Cost and return accounts for commodities reported under the old format still use these regional definitions.

Estimating Costs and Returns

Methods recommended by the American Agricultural Economics Association Task Force on Commodity Costs and Returns have been used to estimate the costs and returns of commodities surveyed in 1995 or later. Specifics of the recommendations can be found in the published Commodity Costs and Return Estimation Handbook. The following is an overview of the estimation methods.

The gross value of crop production is calculated by valuing the survey crop yields by State-average harvest-month crop prices in each year. The gross value of livestock production is the cash receipts received from the sales of feeder animals, market animals, and milk. The value of secondary products such as wheat and oat straw, cottonseed, cull animals, and manure, are also included for both crop and livestock commodities. Secondary products are also valued using survey production levels and State-average prices, or actual cash receipts for some products.

Four basic approaches are used to estimate the commodity costs: direct costing, valuing input quantities, indirect costing, and allocating whole-farm expenses. The choice among approaches used to estimate particular cost items is mainly driven by the ability of farmers to report commodity specific costs for that item. For example, most farmers can report the cost of seed purchased for a commodity, but cannot report the fuel cost for a commodity because fuel is typically used to produce several commodities on the same farm.

Direct costing involves summarizing survey responses to questions about the amounts paid for each input item. For items such as crop fertilizer and chemicals, this is accomplished by asking the farmer how much per acre was paid for the inputs used to produce the crop. For other items such as livestock custom services and repairs, this is accomplished by asking the farmer how much of the total farm expenditures for each input were for production of the livestock commodity. Direct costing is the preferred cost estimation procedure because it does not require any assumptions about prices or quantities. However, it only works well when the farmer has commodity specific records or can recall the amount spent for the commodity.

Valuing input quantities combines survey data on the physical quantities used in the production process with secondary data on input prices. This approach is particularly useful in situations where farm produced or farmer owned inputs are used and opportunity costs are the best means of determining the input values. For example, the costs of homegrown seed and homegrown feed are estimated by valuing the quantities of each used by crop prices. An estimate of the manure nutrient content is valued using State nutrient prices. Unpaid labor hours are valued using an estimate of the wages earned off-farm by farm operators. Land is valued according to the average cash rental rate for land producing the commodity in the particular area. Operating interest is an estimate of the opportunity cost of the investment in the operating inputs during the production period using the 6-month Treasury Bill interest rate.

Indirect costing uses a combination of survey information on production practices, technical information on machine performance, and engineering formulas determined from machinery tests. This method is particularly useful for estimating the costs associated with using farm machinery and equipment because these items are typically used to produce multiple farm commodities and thus are not easily allocated to a single commodity. The method combines survey information on machine type, size, and hours used with secondary information on fuel use rates, repair rates, replacement costs, and years of expected life to drive engineering formulas that compute annual machinery operating and ownership costs. These costs are computed for tractors, trucks, field machinery, and the irrigation and drying equipment used in crop production, as well as the housing, feed storage, and manure handling equipment used in livestock production. The capital recovery method for estimating asset ownership costs replaced the previous capital replacement and nonland capital estimates, per the Task Force recommendations. State machinery replacement prices are used in the capital recovery and repair cost estimates, while State fuel prices are used to estimate the cost of fuels used. An estimate of the long-run rate of return to farm assets out of current income (10-year moving average) is used as the interest rate in the capital recovery estimate.

Allocating whole-farm expenses takes survey responses to whole-farm expense items and allocates them to a commodity according to some allocation scheme. This method is particularly useful for estimating items whose cost cannot be directly attributable to a single commodity, but where all commodities must pay the cost. The allocation scheme used in the cost and return accounts is a estimate of the share of total farm operating margin (value of production less operating costs) accounted for by the commodity. For example, if a commodity accounts for 30 percent of the total farm operating margin, the commodity is charged 30 percent of the overhead, taxes, and insurance costs. General farm overhead costs include costs for farm supplies, marketing containers, hand tools, power equipment, maintenance and repair of farm buildings, farm utilities, and general business expenses. Taxes include non-real estate property taxes and insurance is farm property insurance, excluding crop insurance.