Major Statistical Series 

 of the U.S. Department of Agriculture 



Volume 12: Costs of Production 



Robert G. McElroy 



Introduction 



The Agriculture and Consumer Protection Act of 1973 

 mandated the Secretary of Agriculture to conduct a cost- 

 of-production (COP) study of wheat, feed grains, cotton, 

 and dairy commodities and to establish current national 

 weighted average costs of production. Furthermore, the 

 Secretary was to cooperate with the land-grant universities, 

 commodity organizations, general farm organizations, and 

 individual farmers in making the COP study. The COP 

 study was to be updated annually and to include all typical 

 variable costs, a return on fixed assets equal to the existing 

 interest rates charged by the Federal Land Bank, and a 

 return for management comparable with the normal 

 management fees charged by other comparable industries. 

 These studies were to be based on the size unit that 

 requires one person to farm on a full-time basis. 



The 1973 act did not specify any uses for the cost 

 estimates. However, the Food and Agriculture Act of 1977 

 had specific language requiring use of COP estimates 

 (variable, machinery ownership, and general farm 

 overhead costs) to adjust target prices for corn, wheat, 

 cotton, and rice. 



The 1981 legislation revised the 1973 wording to say: 

 "...include all typical variable costs, including interest costs, 

 a return on fixed costs, and a return for management." 

 The legislation essentially deleted specifying the interest 

 rate and the size requirement. It also deleted the 

 requirement to use COP estimates in farm programs 

 (except for peanuts). The U.S. Department of 

 Agriculture's (USDA) Economic Research Service (ERS) 



Robert G. McElroy is an agricultural economist with the Agriculture 

 and Rural Economy Division, Eiconomic Research Service, U.S. 

 Depaitment of Agriculture. 



simultaneously revised its estimation procedures for 

 several costs, including interest, since actual cash interest 

 payments were available from survey data. ERS also 

 changed the format for presenting the COP budgets to 

 reflect an estimated gross value of production, the out-of- 

 pocket cash expenses and net cash returns, and economic 

 (or full ownership) costs. The latter includes a return to 

 the owned factors of production (land, labor, and capital) 

 and a longrun residual return to management and risk for 

 use in comparing the financial well-being of the enterprise 

 with that of other enterprises. 



The most recent legislation (the Food Security Act of 

 1985) did not address COP research directly, except for 

 the peanut and sugar programs. Therefore, the wording of 

 the 1981 act amending the 1973 act is still in effect. 



Costs for commodities competing with the mandated 

 enterprises have been added, mainly rice, peanuts, 

 soybeans, flax, sunflowers, sugar, fed cattle, cow/calf, hogs, 

 and sheep. Peanuts and sugar are essentially required 

 now, as the 1985 act requires costs of production to 

 establish the support level. Cost estimates for other 

 commodities are planned. 



This volume oi Major Statistical Series oftlie U.S. 

 Department of Agriculture discusses the procedures and 

 data sources USDA uses to estimate production costs. It 

 provides an information source for understanding USDA's 

 COP program. Although the complexity of the USDA 

 program makes it impossible to provide a detailed 

 numerical background for every cost estimate, enough 

 detail is given to describe data sources, concepts, and 

 procedures used. 



