Farm Costs of Production

Production costs consist of operating costs and allocated overhead costs. Operating costs include those inputs that can be valued and directly associated with the commodity being produced – in this case milk. Operating costs for dairy farms include: feed, veterinary services, fuel, and electricity. Allocated overhead costs include those inputs that are typically used on a farm to produce a number of commodities. A dairy farm might sell both milk and hay. Allocated overhead costs are those inputs that are used in producing both commodities, but data do not exist to identify how much input is used for each commodity. For example, a tractor might be used to produce corn silage, all of which is used for the farms dairy cows, as well as hay for both the farm’s dairy cows and for sale. Assumptions are made to allocate the cost of that tractor across the crops used to produce milk on the farm and hay that is sold. Allocated overhead costs are determined for hired labor, taxes and insurance, capital recovery of machinery, and opportunity costs of both unpaid labor and of land (determined by the rental rate).

Figure 30 shows the estimated costs of production for selected states across the country. The states with the highest costs, both operating and overhead, are all from the Northeast, indicating high costs for our region in general. The lowest production costs were found in California, the number one dairy producer in the nation, and New Mexico, the seventh largest producer. Notably, the two states with the lowest production costs also had over 700 cows per farm, on average in 2004. As we show in Figure 32, average costs decline with farm size. New Mexico is also in the region of the country with the lowest farm real estate values, one factor in the allocated overhead costs of milk production. California, however, has some of the highest farm real estate values in the country. Wisconsin, the state with the greatest number of dairy farms, had average costs just above the average for all U.S. farms. Maine was estimated to have the greatest costs for the states surveyed at $29.42 per one hundred pounds produced.

We’ve continued to be interested in comparing three regions on the U.S. , the West, Mid West and Northeast. A simple average of the costs per hundredweight for the western states surveyed ( California , Idaho , New Mexico , Oregon and Washington ) was $15.67, while the average for the Mid-West states ( Illinois , Indiana , Iowa , Michigan , Minnesota , Missouri , Ohio , Wisconsin ) was $20.37 per hundredweight. A simple average for four Northeast states ( Maine , New York , Pennsylvania and Vermont ) was $23.85 per hundredweight. The two biggest producing states in the Northeast, New York and Pennsylvania , had nearly identical costs of production at around $22.60 per hundredweight.

Why are allocated overhead costs in Maine so much greater than the rest of the states? Figure 31 shows the distribution of major overhead costs for Northeast states. Taxes, farm overhead, and opportunity cost of land, area all small components and are similar from state to state. It can be seen that Maine ’s higher overhead costs, are the result, primarily, of higher costs for hired labor, opportunity costs of unpaid labor and capital recovery costs for machinery and equipment. There are several possibilities. If wages on and off farm are higher in Maine , that would lead to higher allocated costs for hired labor and to higher opportunity costs for unpaid labor. The opportunity costs for unpaid labor are based on what farmers could earn by working the same number of hours at another farm or at an off-farm job. The Northeast has been an area of the country with higher wage rates, but it is difficult to believe that Maine farmers face wages rates that are greater than those of New York or Pennsylvania . Capital recovery costs for machinery can be high when farmers have relatively greater amounts of machinery on their farms. Finally, all of the costs per one hundred pounds of milk produced will be affected by the productivity of the cows. If Maine farmers produce less due to weather, the quality of land, and other factors that can affect output per cow, then these factors would also affect the costs per hundredweight produced.

Costs of production vary not only by region, but by farm size. Figure 32 shows the costs for five different categories of farm sizes in 2005. As farm size increases, total operating cost (in dollars per hundredweight) diminishes gradually, while total allocated overhead decreases much more quickly. Operating cost for farms with over 1000 cows are 17 percent lower than those for farms with under 100 cows. Total overhead, however, is 75 percent lower on the larger farms. The smaller decrease in operating cost is expected as the more cows does not mean less feed per cow. The survey data confirm that feed costs decrease only slightly from the smallest to the largest farms. The reduction in overhead costs from smaller to larger farms were the result, mainly of decreases in opportunity cost of unpaid labor, and capital recover of machinery and equipment. Equipment and machinery costs can be allocated across greater numbers of cows, indicating economies of size do exist in milk production.

Source: Figures were constructed using data from the National Agricultural Statistics Service.