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 NASS monthly Milk Production report does not include milk
production estimates for all States that ERS estimates monthly
milk COP. In States where NASS monthly milk production estimates
are missing, milk production estimates from a neighboring State
with similar dairy operations are used as a proxy.
Equations for individual
components of the model are:
Operating costs:
Feed -
Purchased feed = $ARMSPurchased feed * $NASSINDXConcentrates
* (1/$NASSMILK)
Homegrown harvested feed = $ARMSHomegrown harvested feed * $NASSINDXHay
and forages * (1/$NASSMILK)
Grazed feed = $ARMSGrazed feed * $NASSINDXHay and forages * (1/$NASSMILK)
Feed grains = $ARMSFeed grains * $NASSINDXFeed
grains * (1/$NASSMILK)
Hay and straw = $ARMSHay and straw * $NASSINDXHay
and forages * (1/$NASSMILK)
Complete feed mixes = $ARMSComplete feed mixes * $NASSINDXComplete
feeds * (1/$NASSMILK)
Liquid whey and milk replacer = $ARMSLiquid whey and milk
replacer * $NASSINDXSupplements * (1/$NASSMILK)
Silage = $ARMSSilage * $NASSINDXHay and forages
* (1/$NASSMILK)
Grazed pasture and cropland = $ARMSGrazed pasture and cropland
* $NASSINDXHay and forages * (1/$NASSMILK)
Other feed items = $ARMSOther feed items * $NASSINDXSupplements
* (1/$NASSMILK)
Other operating costs -
Veterinary and medicine = $ARMSVeterinary and medicine
* $NASSINDXOther farm services * (1/$NASSMILK)
Bedding and litter = $ARMSBedding and litter * $NASSINDXFarm
supplies * (1/$NASSMILK)
Marketing = $ARMSMarketing * $NASSINDXOther farm
services
Custom services = $ARMSCustom services * $NASSINDXCustom
rates * (1/$NASSMILK)
Fuel, lube, and electricity = $ARMSFuel, lube, and electricity
* $NASSINDXFuels * (1/$NASSMILK)
Repairs = $ARMSRepairs * $NASSINDXFarm repairs
* (1/$NASSMILK)
Other operating costs = $ARMSOther operating costs
* $NASSINDXOther farm services * (1/$NASSMILK)
Interest on operating capital = $ARMSInterest on operating
capital * $NASSINDXInterest * (1/$NASSMILK)
Allocated overhead:
Hired labor = $ARMSHired labor * $NASSINDXWage
rates * (1/$NASSMILK)
Opportunity cost of unpaid labor = $ARMSOpportunity cost
of unpaid labor * $NASSINDXWage rates * (1/$NASSMILK)
Capital recovery of machinery and equipment = $ARMSCapital
recovery of machinery and equipment * $NASSINDXFarm
machinery * (1/$NASSMILK)
Opportunity cost of land (rental rate) = $ARMSOpportunity
cost of land (rental rate) * $NASSINDXRent* (1/$NASSMILK)
Taxes and insurance = $ARMSTaxes and insurance * $NASSINDXTaxes
* (1/$NASSMILK)
General farm overhead = $ARMSGeneral farm overhead
* $NASSINDXProduction items * (1/$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.
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