Enterprise Budgets 



ERS prepares and presents COP estimates as enterprise 

 budgets, which summarize all operator and landlord costs 

 and returns associated with producing a commodity. ERS 

 prepares enterprise budgets on a per-unit basis, such as 

 one acre or one animal. Regional enterprise budgets 

 represent weighted-average production technology and 

 input use. A State enterprise budget covers each 

 commodity in each major producing region. ERS weights 

 these data according to each State's share of production 

 and aggregates them to estimate the regional and national 

 average costs of production. 



Each enterprise budget contains cost and return measures 

 separated into three major categories: cash receipts, cash 

 expenses, and economic (full ownership) costs. 



Cash Receipts, Expenses, and Returns 



ERS includes an estimate of cash receipts (really the gross 

 value of production) in the enterprise budgets so analysts 

 can estimate the residual returns to management and 

 owned resources used in the production process. These 

 residual returns fluctuate because of changes in the 

 harvest-month price (for crops), the average market price 

 (for livestock), and expenses. ERS estimates the receipts 

 by multiplying price times yield and by adding in any value 

 of secondary products Uke straw (crops) or culled breeding 

 stock (livestock). The receipt estimates provide 

 information to assess the economic performance of a 

 commodity in a particular year or over time by permitting 

 analysts to calculate net returns. 



Cash expenses are out-of-pocket variable and fixed costs 

 incurred during the production process. ERS estimates 

 the cash flow position of producers by subtracting cash 

 expenses from the estimated gross value of production 

 (cash receipts). ERS tabulates net returns (receipts less 

 expenses) both before and after a charge for economic 

 depreciation (the replacement of capital invested in 

 buildings and machinery). In any given year, an operator 

 may defer machinery and equipment purchases because 

 of income or tax considerations. However, over the long 

 run, operators must set aside funds to replace worn-out 

 equipment if the operation is to continue on the same 

 scale. The residual returns reflect funds available from 

 the specific crop or livestock enterprise for family 

 living, debt retirement, or discretionary uses and should 

 provide for economic depreciation of machinery and 

 equipment. 



Economic Costs and Returns 



When the cost of production is based on cash receipts 

 versus cash expenses, production costs vary widely bccau.se 



of differing degrees of debt among producers. This vari- 

 ation occurs because cash farm expenses include actual in- 

 terest paid during the year on operating, intermediate, and 

 long-term debt. The cash approach would be incorrect if 

 comparisons were made among various commodities or 

 between regions. But analysts can use total economic (full 

 ownership) costs and returns for comparisons without 

 regard for equity levels or tenure of producers. 



Economic costs consist of cash expenses (less actual 

 interest charges), capital replacement, and imputed 

 charges for the farmer's own factors of production. If cash 

 expenses and replacement charges are subtracted from 

 cash receipts, the residual return to owned inputs can then 

 be allocated to cover the costs of land, machinery, labor, 

 and capital invested in operating inputs during the 

 production process with a residual return to management 

 and risk. The cost allocation to land, machinery, and labor 

 is based only on the imputed value of each item in the 

 production process. 



Individual operators have many methods of allocating 

 residual returns to cover the costs of owned or fixed 

 resources. Some operators assign a proportionately large 

 return to cover landownership costs and then leave a small 

 return to unpaid labor; others do the opposite. In the COP 

 budgets, the procedure for allocating residual revenues to 

 each asset is based on an annual rate of return that the 

 producer could expect capital to earn in the current year. 



The earnings value of an owner-supplied input during the 

 production process is generally difficult, if not impossible, 

 to estimate. For example, one cannot easily assess the 

 additional revenue earned when a producer invests more 

 money in operating inputs than in incurring additional 

 short-term debt. Therefore, ERS calculates the COP 

 estimates by assuming that the rational producer expects 

 money invested in variable production inputs to earn at 

 least as much as if it were rented or placed in a savings 

 account or similar financial instrument. ERS uses a 

 relatively risk-free rate of return, which is a measure of the 

 opportunity cost of these funds, to estimate the imputed 

 annual return to invested operating capital. Among the 

 numerous financial instruments available to producers, 

 ERS uses the average 6-month U.S. Treasury bill rate to 

 reficct a relatively risk-free opportunity cost of funds. 



ERS uses a similar procedure to value the time operators 

 and others work on their farms. At a minimum, their 

 unpaid labor is assumed to be worth the cciiiivalcnl of the 

 hired wage rate. In the crops budgets, total labor expense 

 is divided into hired labor (a cash expense) and unpaid 

 labor (a noncash expense) based on the average 

 percentage of each reported in the FCRS. 



