Commodity Costs and Returns: U.S. and Regional Cost and Return Data

Commodity Costs and Returns About the Estimates Methods U.S. and Regional Cost and Return Data Glossary

Methods of Estimating Monthly Milk Costs of Production

Users of enterprise cost-of-production (COP) data have expressed considerable interest in having milk cost estimates on a monthly basis. Federal budget conferees noted that "monthly production calculations (for milk) are a valuable tool and helpful to Congress in developing dairy policy." Congress included language in USDA's fiscal year 2003 appropriation that strongly urged USDA to make available monthly estimates of COP for milk production in various areas of the United States.

To comply with this request, ERS began reporting monthly milk COP by State (where data are sufficient to support a State estimate) in January 2003. State-level estimates were chosen because the survey data that underlie the estimates were determined to be sufficient to support estimates for most States, and secondary data used to update the data are reported at the State level. COP estimates are reported for 15 States for January 2003 through December 2005 based on a survey of dairy operations as part of the 2000 Agricultural Resource Management Survey (ARMS). COP estimates are reported for 23 States starting in January 2006 based on an expanded survey of dairy operations in the 2005 ARMS.

Methods

The methodology used to estimate the monthly State milk COP is based on USDA annual milk cost-of-production estimates. The most recent annual estimate is the baseline, and monthly estimates are developed using indexes that reflect differences between the month and the baseline. For example, the COP for April 2006 is estimated by indexing the 2005 annual milk COP estimate. The indexes reflect price and other differences between annual average conditions in 2005 and April 2006. Annual COP estimates are updated each year in October. The new annual estimates then become the baseline for subsequent monthly estimates.

Data used to produce the monthly dairy cost estimates include:

• USDA's 2005 ARMS of dairy operations. Starting in January 2006, production costs by State are estimated from the 2005 ARMS of dairy operations, updated annually to reflect changes in input prices and production. Estimates are developed only for the States that had enough survey observations to derive statistically reliable estimates. This included the States of CA, FL, GA, ID, IL, IN, IA, KY, ME, MI, MN, MO, NM, NY, OH, OR, PA, TN, TX, VT, VA, WA, and WI. AZ was the only other surveyed State. Data users interested in an estimate of COP for AZ may want to consider using an estimate for an adjacent State, or the annual milk COP estimate in the region where AZ is located.
• USDA's 2000 ARMS of dairy operations. From January 2003 through December 2005, production costs by State are estimated from the 2000 ARMS of dairy producers, updated annually to reflect changes in input prices and production. Estimates are developed only for the States that had enough survey observations to derive statistically reliable estimates. This included the States of CA, GA, ID, IL, IN, KY, MN, NY, OH, PA, TN, TX, VT, VA, and WI. Other surveyed States included AZ, FL, IA, MI, MO, NM, and WA. Data users interested in an estimate of COP for these States may want to consider using an estimate in an adjacent State, or the annual milk COP estimate in the region where the State is located.
• Annual and monthly U.S. prices-paid indexes for selected farm inputs, services, supplies and repairs, interest, wage rates, rent, and taxes. These are obtained from the NASS monthly Agricultural Prices report.
• Annual and monthly milk production per cow by State from the NASS monthly Milk Production report.

The variables used in the model are:

$ARMS = Weighted-average dairy costs of production in each State developed from the ARMS by ERS. These costs are based on the latest national survey of dairy producers, and updated annually. They are also the basis for the national and regional estimates published by ERS.

$NASSINDX = Ratio of annual and monthly U.S. prices paid indexes for selected inputs from the NASS monthly Agricultural Prices report. For example, the index for April 2006 concentrates equals the April 2006 U.S. index for prices paid for concentrates divided by the average 2005 U.S. index for prices paid for concentrates. This index is used to account for monthly price variation in farm inputs.

$NASSMILK = Ratio of annual and monthly milk production per cow on a daily average basis in each State from the NASS monthly Milk Production report. For example, the index for April 2006 milk production equals the April 2006 milk production per cow on a daily average basis in each State divided by the average 2005 milk production per cow on a daily average basis in each State. This index is used to reflect monthly variation in milk production due to seasonal changes. Since the milk cost estimates are expressed per hundredweight of milk production, this index is used to update the denominator of the ratio. Therefore, (1/$NASSMILK) is used to update the cost items.

The ERS model is written in Microsoft Excel. Equations for individual components of the model are:

Operating costs:

Feed -

Purchased feed = $ARMS_{Purchased feed} * $NASSINDX_Concentrates * (1/$NASSMILK)

Homegrown harvested feed = $ARMS_{Homegrown harvested feed} * $NASSINDX_{Hay and forages} * (1/$NASSMILK)

Grazed feed = $ARMS_{Grazed feed} * $NASSINDX_{Hay and forages} * (1/$NASSMILK)

Feed grains = $ARMS_{Feed grains} * $NASSINDX_{Feed grains} * (1/$NASSMILK)

Hay and straw = $ARMS_{Hay and straw} * $NASSINDX_{Hay and forages} * (1/$NASSMILK)

Complete feed mixes = $ARMS_{Complete feed mixes} * $NASSINDX_{Complete feeds} * (1/$NASSMILK)

Liquid whey and milk replacer = $ARMS_{Liquid whey and milk replacer} * $NASSINDX_Supplements * (1/$NASSMILK)

Silage = $ARMS_Silage * $NASSINDX_{Hay and forages} * (1/$NASSMILK)

Grazed pasture and cropland = $ARMS_{Grazed pasture and cropland} * $NASSINDX_{Hay and forages} * (1/$NASSMILK)

Other feed items = $ARMS_{Other feed items} * $NASSINDX_Supplements * (1/$NASSMILK)

Other operating costs -

Veterinary and medicine = $ARMS_{Veterinary and medicine} * $NASSINDX_{Other farm services} * (1/$NASSMILK)

Bedding and litter = $ARMS_{Bedding and litter} * $NASSINDX_{Farm supplies} * (1/$NASSMILK)

Marketing = $ARMS_Marketing * $NASSINDX_{Other farm services}

Custom services = $ARMS_{Custom services} * $NASSINDX_{Custom rates} * (1/$NASSMILK)

Fuel, lube, and electricity = $ARMS_{Fuel, lube, and electricity} * $NASSINDX_Fuels * (1/$NASSMILK)

Repairs = $ARMS_Repairs * $NASSINDX_{Farm repairs} * (1/$NASSMILK)

Other operating costs = $ARMS_{Other operating costs} * $NASSINDX_{Other farm services} * (1/$NASSMILK)

Interest on operating capital = $ARMS_{Interest on operating capital} * $NASSINDX_Interest * (1/$NASSMILK)

Allocated overhead:

Hired labor = $ARMS_{Hired labor} * $NASSINDX_{Wage rates} * (1/$NASSMILK)

Opportunity cost of unpaid labor = $ARMS_{Opportunity cost of unpaid labor} * $NASSINDX_{Wage rates} * (1/$NASSMILK)

Capital recovery of machinery and equipment = $ARMS_{Capital recovery of machinery and equipment} * $NASSINDX_{Farm machinery} * (1/$NASSMILK)

Opportunity cost of land (rental rate) = $ARMS_{Opportunity cost of land (rental rate)} * $NASSINDX_Rent* (1/$NASSMILK)

Taxes and insurance = $ARMS_{Taxes and insurance} * $NASSINDX_Taxes * (1/$NASSMILK)

General farm overhead = $ARMS_{General farm overhead} * $NASSINDX_{Production items} * (1/$NASSMILK)

Note to Users

Users of the monthly milk COP estimates need to be aware that these estimates are not as reliable as the annual estimates published by ERS. ERS measures COP using the annual costs reported by farmers in the ARMS. Annual updates of the ARMS data are based on much more rigorous procedures than the monthly estimation process, as more detailed data are available for the annual update process. The monthly estimates are simply an attempt to reflect how price and production variations in each month cause costs to vary around the annual average. Also, the longer the time interval between the update month and the year in which the last ARMS was conducted, the less reliable are the monthly cost estimates.

A major source of month-to-month changes in production costs is from seasonal variation in cow productivity. Milk cows produce less during hot summer months despite using about the same level of inputs. This seasonal variation causes costs per unit to increase during the summer even if input prices are unchanged. Seasonal variation in productivity tends to have a greater impact on monthly COP than do changes in input prices.