The
Agricultural Resource Management Survey (ARMS)
The ARMS is USDA’s primary vehicle for data
collection on a broad range of issues about agricultural
resource use, production practices and inputs, farm
costs and financial conditions, and well-being of
farm households. ARMS data provide the only national
perspective on annual changes in the financial conditions
of the farm sector. The ARMS is a flexible data collection
tool with several versions and uses. Specifically,
the ARMS is conducted annually by USDA’s National
Agricultural Statistics Service to:
(1) Gather information about production practices
used to manage pests, soil, nutrients, and other
aspects of plant growth, as well as the management
tools and equipment utilized in the production process.
(2) Determine what it costs to produce various
crop and livestock commodities.
(3) Determine farmers’/ranchers’ net
farm income and provide data on the financial situation
of farm/ranch businesses.
(4) Determine the characteristics and financial
situation of farm/ranch operators and their households,
including information on their off-farm income.
Annual production cost estimates are based on data
collected in the ARMS every 5-8 years for each
commodity and updated each year with estimates of annual price,
acreage, and production changes. More information about the ARMS
can be found at www.ers.usda.gov/ briefing/ARMS
Policymakers and producers grow nervous when commodity prices
dip, as they did during 1998-2001. Weather, breeding cycles, world
stocks, and consumption swings can all make for uncertain farm
income, and a surefire buffer against fluctuations is impossible.
However, farmers make a host of decisions that can predispose them
to weathering out rough patches. Farmers make daily decisions about
input use, seasonal decisions about what to plant, annual decisions
about farmland rental, and multi-year decisions about ownership
and upkeep of land, machinery, and facilities. Farmers’ decisions
affect agricultural production, prices, and costs; the quality
of the environment; the demographics of rural areas; and more.
Farmers’ decisions, in turn, are affected by how production
costs compare with expected returns and nonmonetary benefits (such
as a rural lifestyle) and by the characteristics of the farm (such
as type, size, specialization, and location) and farm operator
(age, education, and off-farm employment).
Analysts can evaluate such decisions to identify perennially high-cost
and low-cost producers and thereby anticipate industry trends.
Based on information from the annual Agricultural Resource Management
Survey (ARMS), this article examines the extent to which
U.S. producers are covering costs and why costs vary among farms.
Are Producers Covering Costs?
Short-term production decisions are mostly based on the relationship
between operating costs and expected product prices. Producers
have already incurred the cost of owning farm assets, and so give
asset cost little consideration. However, as the planning period
stretches to 5-10, or even to 20 years and capital assets have
to be replaced, producers consider both operating and asset ownership
costs in relation to expected prices (see “Enterprise
Production Costs”). Replacement of farm assets requires substantial
investments, so farmers often make that decision in conjunction
with determining whether to continue with a commodity or with farming
altogether. Low-cost producers are generally better able to survive
periods of low prices and thrive when prices improve, while high-cost
producers are often the first to exit farming when prices are low.
While production costs can be used as an indicator of the financial
success of farm enterprises, they are not the complete story. Commodity
prices and revenue from all sources—commodity sales, contracts
in futures markets, production contract fees, insurance indemnity
payments, and government program payments—are needed to put
the costs into perspective. All of these sources can contribute
to the price producers effectively use as the basis for production
decisions.
Arranging farms by production costs per unit shows how
many producers of a given commodity are able to cover costs at
various prices.
For example, at $2.59 per bushel of wheat (the average price
1998-2001), most wheat-producing farms (85 percent) covered operating
costs.
Similarly, most producers of corn (82 percent) and soybeans (96
percent) also covered operating costs, despite low crop prices,
during 1998-2001. This helps to explain why most producers continued
to produce wheat, corn, and soybeans despite the relatively low
prices.
However, when asset ownership costs are factored in, the
picture changes. Nearly half of U.S. corn and wheat producers
and one-fourth
of soybean producers were unable to cover both operating and
ownership costs at average commodity prices during 1998-2001. Because
corn,
soybean, and wheat producers use machinery that is mostly interchangeable
among crops, some producers responded to the low prices by changing
their crop mix. Also, this cost-price squeeze has put an emphasis
on enhancing revenues through a variety of sources, such as government
programs, and on controlling or cutting costs. Government program
support has likely helped many producers remain in business and
may explain why structural adjustments in these industries have
been gradual. Improved prices for most crops in 2002-03 have
also eased the financial pressure on many high-cost producers.
Enterprise Production Costs
The costs of monetary inputs provided by all participants
in the production process—farm operators, landlords,
and contractors—are included in either operating or
asset ownership costs.
Operating costs include the costs for items used in the
production process, such as seed, fertilizer, pesticides,
fuel, feed, veterinary and medicine, and hired labor.
Asset ownership costs include the annualized cost of maintaining
the capital investment (depreciation and interest) in machinery,
equipment, and facilities, and costs for property taxes and
insurance.
Not included in operating and ownership costs are the opportunity
costs for other resources, such as the farmer’s labor
and land. For example, the time spent by a farmer in the
production of a commodity could have been spent producing
other commodities or working at an off-farm job. Land has
a cost equal to its rental rate, whether the land is actually
rented or owned by the farmer. Costs for these resources
may affect the business decisions made by some farmers, but
many farmers are willing to accept a return to these resources
that is less than their opportunity cost in order to remain
in farming.
Hog
and milk producers have faced even more divergent prices and
costs in recent years. While 13 percent of milk producers and 41
percent of hog producers were unable to cover operating costs
between
1998 and 2001, more than half of milk producers and nearly three-fourths
of hog producers were unable to cover both operating and asset
ownership costs. Not surprisingly, many producers exited these
industries and continue to do so as farm milk prices (under $12
per hundredweight) and hog prices (below $40 per hundredweight)
remain low.
The distribution of operating and ownership costs
also reveals differences between low- and high-cost producers.
Low-cost producers,
representing the 25 percent of wheat farms with the lowest total
costs, produced wheat at $1.86 per bushel or less in 1998. In
contrast, high-cost producers, representing the 25 percent of wheat
farms
with the highest costs, produced wheat at $3.62 per bushel or
more. Differences in the characteristics of low- and high-cost
producers
and their farming operations provide insight into why costs vary
among farms and indicate factors that may influence financial
success.
How Do Low- and High-Cost Producers Differ?
ARMS data indicate that low-cost producers are generally younger
and more educated than high-cost producers. For example, more low-cost
producers of corn, soybeans, and wheat are under 50 years of age
than are high-cost producers of these crops. Likewise, low-cost
producers of corn, feeder cattle, and milk are more likely to have
attended college than are high-cost producers. Research has indicated
that younger and more educated producers are more likely to adopt
production practices and technologies that may reduce unit costs
and enhance farm productivity.
Over half of U.S. farm operators
work off the farm, and only about 40 percent of farm operators
consider farming their primary occupation.
Low-cost production of farm commodities is more often associ-ated
with farmers whose major occupation is farming. For example,
94 percent of low-cost hog producers report their primary occupation
as farming, versus just 63 percent of high-cost producers. Producers
dependent on farming as their primary income source likely have
different goals and expectations from farming and may place more
importance on controlling costs. In contrast, producers primarily
retired or part time have a shorter planning horizon and are
more
likely to use facilities and equipment closer to the end of their
useful life and at less than full capacity, which contributes
to higher costs.
Only on cow-calf operations were the production
costs of retirement and residential farms competitive with those
of full-time (occupational)
farms. These cow-calf operations tend to use fewer inputs and
stock fewer cattle than do other operations. Many retirement and
residential
farms raise cattle because of the low labor and management required,
using acreage that would otherwise be idle.
Cost advantages for certain commodities also accrue to regions
due to more productive climate or soils. For example, low-cost
producers of corn and soybeans are more often located in Corn Belt
States where high-quality soils produce higher yields than in the
Southeast, and where ample rainfall reduces costs relative to irrigated
crops in the Great Plains. Low-cost cattle producers are more often
located in Southern and Western States with a milder climate that
reduces cattle feeding costs during the winter. However, technological
and organizational advances in hog and milk production have offset
much of the cost advantage enjoyed by traditional production areas.
As a result, hog and milk production is growing more dispersed.
Size Matters, Particularly for Livestock Operations
Operating costs (per unit) may be lower on larger farms because
of their ability to negotiate volume discounts on inputs, better
management, and other factors. Asset ownership costs may also be
less because capital items—such as machinery, buildings,
and equipment—are spread over more units of production.
Cost-size relationships differ among commodities. Unit costs generally
decline as size increases, but the rate of decline is much greater
for livestock than for crop enterprises. For example, total operating
and ownership costs average about 10 percent lower on very large
cotton farms than on the small farms, but over 30 percent lower
on very large versus small dairy farms. This difference is mainly
due to asset ownership costs on large hog and dairy farms that
are 60 percent less than those on the smallest farms. Unit costs
for the highly specialized facilities and equipment used in livestock
production fall rapidly as production increases and these fixed
costs are spread over more units.
The influence of size on production costs is also evident in that
low-cost operations tend to be larger than high-cost operations.
Low-cost corn producers averaged 206 corn acres in 1996, compared
with 134 acres for high-cost producers. Low-cost soybean producers
averaged 281 acres in 1997, versus 161 acres for high-cost producers.
This difference was even more pronounced among hog and cattle producers.
Low-cost farrow-to-finish hog producers sold 2,180 head, on average,
per farm in 1998, compared with 370 for high-cost producers. Cow
herds on low-cost cow-calf operations averaged 144 head in 1996,
compared with only 35 head on high-cost operations.
Farm size has been increasing in the U.S., and this trend has
been accompanied by greater specialization in production. Greater
specialization is depicted by a higher average share of farm production
derived from a single commodity. The relationship between costs
and specialization has been most apparent among livestock producers.
Low-cost hog and cattle producers were more specialized, on average,
than were high-cost producers of these commodities, generating
more than 50 percent of the value of farm production from these
commodities (compared with less than 30 percent on high-cost operations).
This relationship was not as strong for cotton producers and was
hardly apparent for corn, soybean, and wheat producers. The agronomic
benefits of crop rotations may offset cost advantages of specialization,
plus most machinery investment on crop farms can be spread over
several different crops. The greater average specialization of
low-cost cotton farms reflects the need to spread the cost of specialized
cotton machinery over more cotton acres.
Management Makes a Difference
Crop and livestock producers possess varying management abilities,
and this too affects costs. Although unit costs of hog production
decline significantly with size of operation, many well-managed
small hog operations rival large operations in production costs.
The managerial ability of farm operators is difficult to quantify
by farm and operator characteristics. However, management practices
provide a clue. Low-cost crop and livestock producers used practices
that enhance input productivity (such as crop rotation) more often
than did the high-cost producers. No-till and reduced-tillage practices—which
reduce fuel and capital requirements—were used more often
by low-cost than by high-cost producers of corn, soybeans, and
wheat.
Low-cost livestock producers also tend to manage their operations
more efficiently than high-cost producers. The production facilities
on low-cost hog and dairy operations were operated much closer
to capacity than on high-cost operations. The managerial skills
of low-cost hog producers resulted in more pigs weaned per litter.
Low-cost milk producers more often favored innovative technologies,
such as automated milking facilities and supplemental (milk stimulating)
hormones, to achieve higher production with fewer inputs.
Premium on Cost Control
The recent economic pinch encountered by the farm sector has put
a premium on cost control among crop and livestock producers. Prices
for many field crops have been low relative to the “boom” years
of 1996 and 1997, although recently prices have increased. Livestock
prices have been highly variable, with hog and milk prices near
historic lows at times. To make matters worse, increased energy
prices have caused spikes in fuel and fertilizer costs. Also, some
farms may have to absorb the costs of complying with increased
environmental regulation, such as new rules limiting the amount
of manure nutrients that large livestock operations can apply to
land.
In response to this cost-price squeeze, many producers will attempt
to maintain profitable operations by trying to control costs. Others
may opt out. Policymakers have been concerned about what this cost-price
squeeze means for the future of family farms and the structure
of the farm sector in this newly volatile setting. ARMS data indicate
that, at recent commodity prices, nearly half of corn producers
and up to three-fourths of hog producers are caught in this cost-price
squeeze. If large numbers of these operations go out of business
and their production is mostly taken over by other existing firms
(as opposed to new entrants), concentration of production in the
hands of fewer producers would further increase.