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Methodology for Calculation of Costs and Returns of Production

INTRODUCTION

Northeastern farmers produce literally hundreds of products ranging from traditional crop and livestock products to vegetables, nursery products, greenhouse products. For the purposes of this study, it was decided that the research would focus on key products for which researchers, agents, policymakers, and farmers typically need information.

Production costs of farm products vary considerably, from farm to farm and season to season. The variations are based on the unique character of each operation and the uncertainty of factors beyond the control of the farm operator. The source of some of the differences can be found in several key input categories, such as: (1) machinery costs which can vary because of the differences in age, size, and usage of equipment; (2) irrigation costs which are subject to variations in rainfall, temperature, and irrigation systems; (3) fertilizer, seed, and chemical costs which will vary depending on quantities used and prices paid; and (4) labor costs which are dependent on prevailing wage rates, working conditions, and the efficiency of individual workers. Standardized values have been used in the estimation of production costs, assuming typical practices under average conditions on commercial farms. Thus, the budgets included in this study are intended to be used as a guide to help producers develop costs of production budgets for their particular operation.

Crop production costs include expenses for materials used in production such fertilizers, chemicals, seeds or plants, and fuel; costs of land, labor, machinery and management; and irrigation and marketing costs where applicable. Livestock production costs include expenses for replacement stock, feed, utilities, insurance, medicines and marketing; cost of labor and management; and cost of land and buildings. In addition, interest on operating capital was charged on variable costs in all cases. Since standardized values have been used in the development of the budgets, they are able to provide the type of information needed for management decisions and for comparing relative profits and cost structures between enterprises. The detailed methodology for the estimation of production costs and net returns is discussed below.

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A. CROP BUDGETS

A.1. Receipts per Acre

Receipts per acre were determined by multiplying the average yield by the season adjusted price for each crop. It should be noted that the yields represent the best estimate of the marketable yields expected by a commercial grower. The 1996 season adjusted prices and in some cases, weighted average prices, were used.

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A.2. Costs per Acre

A.2.1. Materials and Related Services

Cost of materials and related services make up a major component of variable costs involved in the farming operation. The items included are: custom work such as lime application and grain drying; chemical inputs such as fertilizer, herbicides, fungicides, and insecticides; seeds or transplants; fuel; marketing; and packing containers for fruits and vegetables. Chemical usage is based on conventional practices. Given the great interest in reducing chemical inputs in agricultural production, the chemical input section is itemized in detail, enabling the grower to estimate changes in net profits based on changes in chemical use. Input prices for 1996 reflect grower rates, which are the discounted prices applicable to large volume purchases.

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A.2.2. Labor

For a more accurate estimation of labor costs, labor was divided into three categories: operator labor, regular hired labor, and seasonal hired labor. Operator labor is used primarily for operating machines and for tasks which require a high level of skill. This type of labor is generally provided by the owner or farm family members. Regular hired labor is somewhat less skilled and used primarily for the performance of general farm operations such as equipment operation, pruning, etc. Seasonal hired labor is used primarily for planting, weeding, harvesting, and packing of products. The amount of operator, regular hired, and seasonal hired labor required for each crop depends on the number and frequency of tasks, the overall size of the operation, and whether harvesting is accomplished by hand or machine.

Labor wage rates for 1996 are based on the New Jersey Agricultural Statistics Service average cash wage rates paid in January and July. In addition, mandatory state and federal benefits such as social security, workers compensation, and unemployment insurance were also included. The estimated wage rates and benefits are as follows: Operator: $12.32 + 17.5% in benefits or $14.48/hour; Regular hired labor: $8.62 + 17.5% in benefits or $10.13/hour; Seasonal hired labor: $6.90 + 11.95% in benefits or $7.24/hour. These wage rates were applied to all the budgets to allow for consistency, regardless of the state of origin.

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A.2.3. Machinery and Equipment

Machinery and equipment costs consist of overhead costs and operating costs. The estimates of the overhead or fixed costs of machinery and equipment were based on the replacement values of the machines, and include depreciation, interest, and insurance. The operating costs include repair and maintenance costs, as well as fuel and oil costs of self propelled machinery. The operating costs of machinery are a component of variable costs.

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A.2.4. Irrigation

Irrigation is essential for producing quality fresh fruits and vegetables in the Northeast.. Therefore, costs of installing and operating an irrigation system are included in the budgets. The cost of irrigation is accounted for differently for fruits than for vegetables. The fruits included in this study are perennial crops and the budgets were developed for the various growing cycles. The cost of installing the irrigation system is accounted for in the planting year and operating costs of the system are included in each subsequent year. For apples and peaches, custom installation of a drip irrigation system for 272 and 141 trees respectively, was estimated by an irrigation system installation firm. The cost for apples is $800 per acre, and the cost for peaches is $700 per acre. It is anticipated that the useful life of the system is the same as the life of the orchard (about 20 years). For years one through twenty, for both apples and peaches, the annual operating costs per acre including energy and maintenance costs, are estimated to be $250.

The cost of a custom installed solid-set irrigation system for blueberry production is estimated to be $2,000 per acre. It is anticipated that the system will last the life of the plantings (about 20 years). The annual operating costs of the system including energy and maintenance costs are estimated to be $200 per acre. The cost of installing and operating an irrigation system for cranberries which is used during the period when the bogs are not flooded, is estimated to be $2,000 and $200, respectively. For raspberries, the cost of installing a drip irrigation system is estimated to be $530 per acre, with operating costs estimated at $120 per acre. A drip irrigation system for strawberries is estimated to cost $810 for installation and $100 for operating costs per acre.

Overhead and drip are the two types of irrigation systems most commonly used in vegetable production. Cabbage, cucumbers, lettuce, pumpkins, snap beans, sweet corn, and processing tomatoes are typically irrigated with an overhead sprinkler system. For these crops, costs per acre including fixed and operating expenses are estimated at $192. Bell peppers and fresh market tomatoes typically utilize drip irrigation. Costs per acre, including fixed and operating expenses, are estimated at $300.

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A.2.5. Land

Cost of land for producing field crops was estimated by using the 1996 agricultural value of cropland which was reported to be $661 per acre by the New Jersey Department of Agriculture and the State Farmland Evaluation Advisory Committee. Using an interest rate of 7.5%, the annual cost of land is estimated at $49.58. Additional information obtained from farmers and county agents, indicated that rental rates for cropland in the state are about $50. Given the consistency of the two figures, the annual cost of land for field crops is assumed to be $50 per acre.

For higher value crops such as fruits and vegetables, a cost of $100 per acre is used based on the recommendations of Cooperative Extension personnel and selected growers. For cranberries, a cost of $250 per acre is used. This figure is justified by the high value of the crop, the stringent regulations regarding new bog creation, and the limited supply of bog acreage. In all cases, land cost was assumed to be inclusive of property taxes.

As with labor wage rates, the cost of land was kept consistent among the budgets, regardless of the state of origin. This was done to allow for a more accurate comparison of production costs among the various crops and production methods.

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A.2.6. Interest on Operating Capital

It is a common practice among farmers to incur short term loans to pay for supplies, labor, and purchased inputs. To account for this, interest on operating capital is included as a cost of production. Interest on operating capital is charged on total variable growing costs at a rate of 10 percent per annum for half of the growing period which was assumed to be seven months. Interest on harvesting and marketing costs is calculated for a period of one month only. For the non-bearing years of perennial crops such as apples, peaches, blueberries and cranberries, interest is calculated for the full year. Selling charges for fruits and vegetables are not included in the calculation since they are deducted from revenues at the time of sale. For livestock, interest on operating capital was calculated for a period of one month only, due to the regular flow of revenue from sales.

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A.2.7. Allocation of Pre-production Costs

The productive years of perennial crops are generally preceded by a non-productive period when development costs for land preparation, plantings, irrigation installation, and fencing are accrued without generating any revenue. These accumulated development costs of the pre-production period are typically allocated over the subsequent producing years. The pre-production costs for apples, peaches, blueberries, cranberries and raspberries were allocated over 17 productive years and alfalfa-hay and strawberry pre-production costs were allocated over four productive years by using the cost recovery method with an interest rate of 8 percent (See Appendix Tables A1 - A6).

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A.2.8. Management Fee

In addition to providing labor, owners also perform managerial functions on the farm. Therefore, in addition to the operator's labor cost, a management fee is also included as a cost of production. A management fee is charged at the rate of 7 percent of total production costs, excluding the cost of land and packing boxes (USDA, 1979; Dhillon and Latimer, 1986).

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A.2.9. Marketing Costs and Selling Charges

Marketing costs, where applicable, have been included as a cost of production. These costs can include items such as picking and packing boxes, packaging materials, transportation and selling charges. An important component of the marketing process is the transaction method used to sell the product. A significant portion of farmers in the Northeast sell their products through a third party, typically an auction or a broker, for which a selling charge is assessed in return for services. Vegetable auctions usually charge a rate of 3% of gross sales, thus this rate was used as the basis for selling charges on all vegetable budgets. A rate of 6% of gross sales is typically charged at fruit auctions and this rate was used for the apple, peach, strawberry, and raspberry budgets. The majority of blueberries are sold through a broker system, with an average selling charge of 9% of gross sales. No selling charges were included in the cranberry budget since the berries are usually contracted to a processor, such as Ocean Spray.

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B. LIVESTOCK BUDGETS

Cost of production budgets for five important livestock enterprises, namely, dairy cow, poultry (egg layers), dairy beef, spring lambs, and goats are included in this study. The dairy cow budget is based on a cow producing 19,000 pounds of milk plus the cost of raising a replacement. Receipts from the enterprise include milk sales and a percentage of cull cow, heifer and bull calf sales. The budget for dairy beef steer is based on the assumption that the calves are purchased at 100 pounds and are sold at a weight of 1,300 pounds. Variable costs of the enterprise include costs of purchased and home grown feed; bedding, veterinary, fuel, utilities and miscellaneous expenses; marketing costs; labor costs; and repair and maintenance expenses.

The poultry budget is based on a 108,864 bird cage operation which consists of four decks of cages laid out in six rows with nine birds per cage. Production receipts are generated by the sale of six grades of eggs (jumbo, extra large, large, medium, small, and undergrades) as well as the sale of fowl. Among the cost items, feed represents the largest proportion of expenditures, accounting for over half of the costs.

There are three budgets for dairy goats based on the level of milk production - 1,500 lbs., 1,800 lbs., and 2,100 lbs. In all cases, the budgets are based on a 100 doe facility using artificial insemination, with does producing an average of two kids per year. Revenues from dairy goat production are generated from milk sales and the sale of culled does and male kids.

The spring lamb budget includes feed costs based on lambs and replacements fed to 110 pounds. It is estimated that 1.65 lambs are marketed per ewe with additional revenues coming from the sale of culled ewes, rams, as well as wool and hides.

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C. ICM BUDGET INFORMATION

The integrated crop management budgets are based on the sustainable practices described in Part II and were provided by Northeast Farm Management Committee members affiliated with The Pennsylvania State University Cooperative Extension and the University of Massachusetts Cooperative Extension. For the purposes of this study, the budgets were adjusted to reflect a standard price for chemicals, seeds, transplants, labor, land, and irrigation among all of the budgets so that comparisons can be more accurately made between enterprises and cropping systems.

Cost of support services for integrated crop management such as scouting fees and soil tests were not included in the budgets. In many states, these services are provided by the cooperative extension for a minimal fee and charges vary by enterprise. The following are estimated scouting costs for New Jersey farms. For field crops, scouting fees are charged by the acre and cost about $8 an acre. Scouting fees for vegetables vary by crop - for example, some typical charges are: $9/ acre for sweet corn, $30/acre for tomatoes, $20/acre for peppers, $20/acre for cole crops <20, $10/acre for cole crops >20 acres, $5/acre for potatoes, $5/acre for beans, and $5/acre for cucumbers. Fees include twice weekly visits and posting of field and trap data with thresholds when applicable. Blacklight Trap programs are also available at a cost of $325 per farm. Scouting fees for tree fruits are $10-$12/acre for peaches and $14/acre for apples, with a $300 minimum per farm. Soil tests with micro-nutrient levels cost about $8-$10 per field.

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D. ORGANIC BUDGET INFORMATION

Costs of production for the organic budgets were based on information provided by the Rodale Insitute for field crops, University of Vermont for livestock, and the University of California, Davis for apples and vegetables (due to lack of information in the northeast). All budgets were adjusted to reflect input costs in the northeast including costs of manure, organic chemicals, seeds, transplants, labor, machinery, land, and irrigation. No information is provided on yield quantities or prices in the budgets due to lack of reliable data.

The organic budgets in this study reflect the practices and costs associated with an intensive organic production system. The farms represented are assumed to be certified as organic. Commodities that are produced organically can often be sold for a premium price over conventionally grown products (about 15%-20% higher). However, the supply of organic products, market competition, and consumer demand can affect grower returns. A description of some general assumptions upon which the vegetable and apple budgets were based is provided in the following discussion.

For the organic vegetable budgets, production costs were based on the assumption that crops are planted on 40 inch beds. Seed and transplant costs are within a range of costs for different open-pollinated and hybrid vegetable cultivars. Varietal planting decisions should ultimately be based on the crop’s compatibility to the climatic region, the disease resistance capability, yield potential, overall quality at harvest, and the cultivar’s marketability. To manage soil tilth, fertility, and nutrient levels, some soil amendments such as compost and manure are applied to production lands.

In this study, disease incidence and pest damage are assumed to be low. However, this may vary on a year to year basis depending on pest populations and management techniques. Weed populations are reduced through a variety of techniques including mechanical cultivation, hand and flame weeding. Most harvest operations are performed by the grower with some contract labor, and reflect hand harvest and field or shed packing.

The organic apple budget is based on an orchard size of 40 acres. Apple varieties are not specified in this study. Factors affecting varietal selection include adaptability to climatic region, time to maturity and marketability. Trees are planted on a 12’ x 18’ spacing with 202 trees per acre. A winter annual cover crop is sown each year in the fall. The cover crop is not irrigated, but is dependent on moisture in the soil profile and rains for germination and growth. In the spring, the cover crop is incorporated into the soil. Following this, composted manure is applied and disced into the soil. Throughout the remainder of the spring and summer, orchard centers are disced periodically to control weeds. Hand weeding is used to control any vegetative growth in the tree rows. Not other means of weed control are used in this report.

In general, pest control products used by organic growers are not as effective as synthetic pesticides for immediate or acute problems. The cost for some organically acceptable pest control methods may be prohibitive for many growers. Therefore, orchard sanitation, pest identification, monitoring and prevention are essential elements of successful organic apple production. Also, the timing of material applications is critical for effective insect and disease control in apples.

Apples are hand thinned as opposed to chemical thinning in the conventional and ICM budgets. The number of thinnings depends on the variety, seasonal conditions, and targeted market. Growers often thin higher value apples more than one time each year in order to produce consumer-preferred large size fruit. Harvesting is performed by the grower and is done by hand. This study assumes that harvest takes place in October. The assumed fresh market yield for organic apples is 375 boxes per acre. Boxes weigh 40 pounds and are tray packed. Yields may vary widely depending on such factors as planting density, variety, orchard age, production location, and seasonal growing conditions.

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