Production costs
#
(Continued from Page DI8)
measuring them. Such things as
expectations for the future, the
pride of ownership, and the desire
to farm are some possible
examples.
Social justification
The principal social justification
tor the dairy price support
program is to assure an adequate
supply of milk for domestic con
sumers. Of course, to effect such
an assurance, it is necessary that
dairymen receive a price that at
least equals the sum of costs
relevant in their decision-making
process. They need not receive a
price that assures some minimum
level of profits or return, only one
that will maintain the desired flow
of milk to market. Establishing a
minimum price above that level
will result in the production of milk
surpluses. The point emerging
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here is that dairy farmers have
produced an adequate supply of
milk at prices that are below the
costs which include a charge for
land at the opportunity rate of
return on that land. Thus, to assure
an adequate supply of milk, it is
not necessary to assure a rate of
return to land where value is based
on current market values.
When the purchase of any capital
asset is contemplated, the decision
is made on the basis of whether an
additional return will be generated
that is at least equivalent to the
additional costs of owning the
asset. In the special case of land,
which does not depreciate in value
in the usual sense of the word,
there has been unusual ap
preciation in values due to in
creased demand for the fixed
supply that exists. These increases
in values really should be counted
10.9%
Annual Percentage Rate
SANDBLASTING
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Aerial ,
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Farm Buildings
Feed Mills
Commercial- , ,
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667 Hartman Station Rd.
Lancaster, PA
393-6530
Instrument Panel
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Carlisle, PA
PETERMAN
FARM EQUIPMENT
717-249-5338
Chambersburg, PA
CLUGSTON
IMPLEMENT INC.
717-263-4103
on the returns side ot the ledger as
offsets to the costs of land if the
opportunity cost concept ot land
valuation is employed. Otherwise,
an upward ratchet effect is set in
motion that assures higher and
higher costs and so requires higher
and higher prices to cover those
costs. For example, it the value of
land goes up $lO,OOO during a year,
there is an increase in costs of
$l,OOO if the appropriate op
portunity rale of return is 10
percent. Since costs went up to
$l,OOO, then price must go up
enough to cover the additional
cost. In part, at least, because the
price of milk went up, then the
value of land also goes up next
year. Then cost of production
again increases, the price of milk
must again be raised to cover the
increased cost, the value of land
again rises, and so on. What is
forgotten, ignored, or simply
omitted in the cost analysis is the
$lO,OOO in appreciation in the value
Operator Comi
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& SUPPLY CO.
717-788-1127
Honey Grove, PA
NORMAN 0. CLARK
& SON INC.
717-734-3682
ot land. This is a return to the
owners ot the land that is as real as
the foregone opportunity costs of
the land that is usually considered
a cost.
Keplacement reserves in lieu ot
depreciation for depreciable
capital assets have been m
corported in the USDA-COP
estimates since their inception in
19 74. Through 1978 they were
referred to as depreciation instead
of by their current nomenclature,
but the basis for their calculation
has been the same throughout the
entire USDA-COP series.
Keplacement costs for any given
year are current list prices for the
item of interest divided by years of
expected life. Using this approach,
instead of the conventional
depreciation approach, generally
overstates the costs of depreciable
capital assets in two respects. One
is that "list” prices are in fact
usually ceiling prices seldom do
dairymen pay full list. The second
upward effect on cost estimates is
the fact that most dairymen have
been in business for some time and
they have a collection of
depreciable capital assets of
varying ages and values, bought at
average prices lower than current
prices.
The USDA-COP studies assume
that each dairyman is starting ail
over each year with a complete set
of new machinery, equipment, and
buildings. This is somewhat akin to
valuing land at its current rather
than its acquisition value. It does
not seem likely that a dairy far
mer, when contemplating the
purchase of a tractor, really
considers what it will cost to
replace the tractor say 10 or 15
years down the road. What is of
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Mill Hall. PA
DUNKLE & GRIEB
717-726-3115
Drums, PA
Palm, PA
WENTZ
FARM SUPPLIES INC.
215-679-7154
BARTROH FARM SUPPLY
Myerstown, PA 717-836-3740
SWOPE & BASHORE INC. Harrisburg. PA
717-933-4138 HIGHWAY EQUIPMENT & SUPPLY CO.
717-564-3031
Lancaster Farming, Saturday, June 18,1983—D19
Replacement reserves
in lieu of depreciation
Isolated Hydraulic
Reservoir Keeps
Oil Clean
BENDER IMPL INC.
814-443-4611
Slatington. PA
SCAT ENTERPRISES INC.
215-767*1711
importance now is whether enough
revenue will be generated to cover
the present purchase price over
the tune the tractor is used. What a
farmer paid for a depreciable
capital asset is what is cost him or
her not what he or she would
have to pay for that asset if he or
she were to buy it now. Suppose,
unlikely though it seems, that
prices of depreciable capital assets
generally decline over time rather
than continue to increase as has
been the case for many years. Is it
as likely that anyone would then
still argue that replacement costs
should be used in heu of
depreciation?
Management
Management charges are now
computed at seven percent of the
total costs associated with the
dairy enterprise in the USDA-COP
senes. Earlier, they were com
puted at seven percent of dairy
enterprise product sales. The 1973
Agricultural and Consumer
Protection Act, the basic
legislation governing the USDA
costs studies, specifies that a
"return for management com
parable to the normal
management fees charged by
other comparable industries” can
be included in costs (.1, page 1).
The problem associated with
determining the appropriate level
of such fees or charges is
recognized and remarked upon in
the USDA reports. The notion that
management is a risk factor
hoping for a return on owner
operator dairy farms, rather than
a cost factor demanding to be paid
was developed in an earlier section
of this report. Feed is the most
important cost item on dairy
farms, and feed prices are
probably the most variable of all
(Turn to Page D2O)
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Tunkhannock, PA
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Quarryville, PA
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717-786-7318
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301-658-5568