rates per hour for operating special livestock equipment 

 come from an unpublished study of energy use on dairy 

 farms conducted in the midseventies by USDA and the 

 Federal Energy Administration. 



COP surveys measure labor data for livestock enterprises. 

 Hired labor is a cash expense; hired labor used to produce 

 farm-grown feed is included in the feed costs. The 

 economic cost section carries total unpaid labor for the 

 enterprise and for any farm-grown feed. Fixed cash 

 expenses for crops and Uvestock consist of taxes, insurance, 

 general overhead, interest, rent, and leasing costs. Taxes 

 include personal property taxes on machinery and real 

 estate taxes (7). Basing insurance and personal property 

 tax estimates on current machinery and hvestock prices 

 can change this component of total cost. Therefore, tax 

 and insurance costs for machinery are first computed 

 based on current machinery prices and are then lagged 4 

 years, which assumes that major high-cost items in the 

 machinery complements (such as tractors) are owned by 

 the average commercial producer for about 8 years. 



General farm overhead includes electricity for general 

 farm use, telephone, office supphes, fees and dues, water 

 drainage fees, liability insurance, fence repairs, and 

 general business expenses. ERS collects costs for these 

 items from the FCRS and allocates the costs among the 

 commodities based on total farm receipts. 



The annual FCRS also provides data on cash interest 

 expenses. ERS calculates cash interest expenses for the 

 farm business separately and reports them as a total for all 

 nonland and real estate categories. Real estate interest 

 consists of payments on loans secured by real estate. 

 Interest on all other loans falls under the nonland 

 category. ERS bases the enterprise interest expense on 

 the FCRS percentage of total dollars of interest per dollar 

 of total farm sales times the estimated COP budget 

 receipts. 



ERS estimates the costs of machinery, equipment, and 

 breeding livestock based on current acquisition prices. 

 Capital replacement represents a charge sufficient to 

 maintain the machinery or livestock investments and 

 production capacity through time. 



The budgets include replacement costs associated with 

 breeding stock. The value of purchased breeding animals 

 is allowed to depreciate to salvage value. The number of 

 years over which an animal's value depreciates varies by 

 region and species. Animals used for replacement, but 

 raised on the farm, are not depreciated because the cost of 

 raising these replacements is included in the budget. 

 Depreciating raised replacements would be double 

 counting. 



Economic (Full Ownership) Costs 



Estimated economic (or full ownership) costs allow ERS 

 analysts to compare commodity returns across varying 

 levels of equity and tenure. Variable expenses, general 

 farm overhead, and taxes and insurance in the "economic 

 cost" section are the same as those in the "cash expenses" 

 section. The capital replacement allowance is also 

 identical to that listed in the cash expenses section. After 

 the above items are subtracted from estimated receipts, 

 the remaining return to owned inputs must be allocated to 

 operating capital, other nonland capital, unpaid labor, 

 land, and management and risk because these costs cannot 

 be determined during the production period through 

 market transactions and must, therefore, be imputed. 



ERS does not estimate the value of production assets, such 

 as machinery, equipment, breeding livestock, and labor, at 

 their acquisition costs. An average operator could expect 

 these inputs to receive an annual return equal to their 

 opportunity costs in alternate uses, exclusive of asset 

 valuation changes because of inflation or deflation. The 

 rate of return for any nonland asset used in the production 

 process must be calculated from residual earnings from 

 the current production process. Earnings from price 

 appreciation (capital gains) or price depreciation are not 

 included here or in the value of production or receipts 

 section. ERS analysts calculate the rate of return for a 

 given year by taking the average of the previous 10-year 

 total return to production assets in the agricultural sector, 

 subtracting the value of the operator's labor used each 

 year, and dividing this figure by the value of production 

 assets. All three series appear in Economic Indicators of 

 the Farm Sector: National Financial Summary {6). The 

 10-year average calculated rates of return for 1978-85 are: 



ERS charges the opportunity cost of operating capital on 

 all variable inputs from the month of use to the harvest 

 month. For example, seed corn is purchased and planted 

 in April-May, and the crop is harvested 6 months later in 

 October-November. The charge for annual capital needed 

 for operating inputs uses the 6-month U.S. Treasury bill 

 rate. 



The expected rate of return generated by agricultural 

 production assets determines the allocated return (cost) 



11 



