Burton Pflueger

English

Research Papers in Economics

            E C O N O M I C S 
   C O M M E N T A T O R 
South Dakota State University      No. 485                                 April 6, 2007
 
                   
Production Costs 
 
     by 
 
Burton Pflueger 
 Professor / Extension Specialist 
 
South Dakota producers are contemplating the time 
when they can begin spring field work.  While several 
factors, including weather during the planting season, 
will still influence the final acreage planted, 
producers need to finalize their spring planting 
intentions.  Estimates of costs and returns will be 
major factors in the consideration of what crops to 
plant and whether producers will make adjustments to 
their crop rotations and crop enterprise mix. 
 
The Economic Research Service, U.S. Department of 
Agriculture released their forecast of annual 
production costs on Friday, December 29, 2006.  ERS 
forecasts show producers can expect higher 
production costs for the next two years. (Source: 
http://www.ers.usda.gov/)  Data comparisons across 
the forecasted ERS production costs show similar 
percentage increases across the three major South 
Dakota spring crops per categorical item for both 
2007 and 2008 as shown in the first table.  This 
information should be useful to South Dakota 
producers.   
 
However, the ERS production costs projections are 
for the U.S. agricultural sector.  The total production 
costs for each of the major spring South Dakota crops 
listed by ERS is higher than what many South Dakota 
producers may actually be spending for crop 
production costs. 
 
Accessible farm level data for South Dakota cost of 
production comparisons is contained in the annual 
report published by the Farm Business Management 
Program instructors.  The Farm Business  
 
Management Program is coordinated by the Division 
of Workforce and Career Preparation with the South  
Dakota Department of Education and Cultural  
Affairs.  The annual published report contains a 
summary of data voluntarily submitted by program 
participants and is a valuable resource for South 
Dakota’s agricultural sector. 
 
 
 
 
      Item 
2007F 
Average 
% increase 
from 2006 
2008F 
Average 
% increase 
from 2006 
Operating costs:     
  Seed  5.94%  7.53% 
  Fertilizer  8.55%  11.10% 
  Chemicals  6.98%  9.29% 
  Custom operations  6.30%  7.74% 
  Fuel, lube, and electricity  -0.75%  0.14% 
  Repairs  3.38%  4.70% 
  Other variable expenses 1/
   3.50%  7.17% 
  Interest on operating capital  17.44%  25.40% 
     Total, operating costs  5.55%  7.46% 
Allocated overhead:     
  Hired labor  3.55%  4.78% 
  Unpaid labor  3.32%  4.51% 
  Capital recovery  7.55%  10.66% 
  Land  7.02%  9.34% 
  Taxes and insurance  2.59%  3.81% 
  General farm overhead  3.01%  3.62% 
      Total, allocated costs  6.24%  8.51% 
      Total costs listed  5.97%  8.09% 
 
 
Value from this information comes from observing 
trends over time. Summarizing the published data for 
several years shows the same trends in increasing 
production costs for South Dakota producers as for 
U.S. producers as a whole.  
 
 
 
Corn for Grain - All Fields Average
Source: South Dakota Annual Report Farm Business Management Program
$0.00
$100.00
$200.00
$300.00
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
Year
D
o
l
l
a
r
s
Total Variable costs Total Allocated Costs Total Listed Costs
 
 
Soybeans for Grain - All Fields Average
Source: South Dakota Annual Report Farm Business Management Program
$0.00
$50.00
$100.00
$150.00
$200.00
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
Year
D
o
l
l
a
r
s
Total Variable costs Total Allocated Costs Total Listed Costs
 
Spring Wheat - All Fields Average
Source: South Dakota Annual Report Farm Business Management Program
$0.00
$50.00
$100.00
$150.00
$200.00
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
Year
D
o
l
l
a
r
s
Total Variable costs Total Allocated Costs Total Listed Costs
 
 
Data summaries show that, on average, South Dakota 
producers spend less on production costs than what is 
estimated by ERS.  While it is interesting to note that 
total cost of production expenditures are lower in 
South Dakota, it may be of greater interest to 
producers using aggregate farm level data for 
benchmarking purposes to understand a breakdown of 
expenditures rather than an estimate of total 
production costs.  Even within South Dakota, there 
will be differences between farms on the dollar 
amounts spent for production inputs. 
 
 
 
Analysis of the data shows that the percentage 
expenditure of production inputs remains fairly static 
despite an increasing total cost of production. 
 
For South Dakota corn producers represented by the 
Farm Business Management Program, the 
expenditure for variable costs of production is 
approximately one-half of the ERS estimate shown.  
At least some of this difference is due to accounting 
issues with some items.  For example, energy costs 
are included in the ERS estimate as a variable cost 
while the Farm Business Management Program data 
lists the comparable item as an allocated cost.  It 
should be noted that information in this report is taken 
directly from published information and no data 
correction was possible.  For example, published 
reports from the Farm Business Management program 
show that South Dakota producers had a corn 
production expenditure of $11.19 per acre in 2005 
categorized as other expenses while in prior years this 
expenditure never exceeded $1.16 per acre.  Similarly 
for soybeans, South Dakota producers had an 
expenditure of $0.62 per acre for crop insurance in 
2004, while in 2003 this expenditure was reported at 
$6.76 per acre and in 2005 the expenditure was 
reported to be $7.52 per acre.  The emphasis for this 
newsletter is that readers should not focus on 
individual cost items in the budgets or reported costs 
of production,  but examine the trends in total costs as 
each producer who reports data makes changes 
annually. 
 
Comparisons from the Farm Business Management 
program show that South Dakota producers in their 
database have consistently spent about 48% of their 
total production costs for variable cost inputs.  In 
addition, they have spent approximately 33% of their 
corn production variable costs for fertilizer and about 
30% for seed.  Seed expenditures have been 
commanding a higher percentage of variable costs 
over time, while expenditures for chemicals have 
been decreasing on a percentage of total variable cost 
basis.  It is interesting to note that as a percentage of 
total variable costs, the expenditure for crop insurance 
has been increasing over the last ten years. 
 
 
Corn for Grain (Source: South Dakota Annual Report Farm Business Management Program) 
Average of all Fields  10 year 
average 
5year 
average 
3 year 
average 
Fertilizer as % of total variable cost  32.72%  33.01%  33.69% 
Chemicals as % of total variable cost  25.60%  22.93%  21.82% 
Seed as % of total variable cost  28.42%  29.84%  30.39% 
Drying as % of total variable cost  1.10%  0.85%  0.85% 
Crop Insurance as % of total variable cost  7.84%  8.94%  10.09% 
Other Expense as % of total variable cost  1.66%  2.32%  3.53% 
Special Hired Labor as % of total variable cost  0.12%  0.16%  0.13% 
Custom Work as % of total variable cost  2.57%  2.26%  1.79% 
Irrigation as % of total variable cost  0.28%  0.57%  0.94% 
Total Variable costs  $94.17  $103.26  $109.70 
Variable cost as % of Total Cost  46.69%  47.97%  48.01% 
 
 
Soybeans (Source: South Dakota Annual Report Farm Business Management Program) 
Average of all Fields  10 year 
average 
5year 
average 
3 year 
average 
Fertilizer as % of total variable  cost  13.20% 13.93% 14.98% 
Chemicals as % of total variable cost  33.41%  27.84%  25.14% 
Seed as % of total variable cost  36.93%  41.49%  42.23% 
Drying as % of total variable cost  2.63%  7.49%  14.18% 
Crop Insurance as % of total variable  cost  8.56% 8.31% 7.88% 
Other Expense as % of total variable cost  1.23%  0.74%  0.63% 
Special Hired Labor as % of total variable  cost  0.71% 1.12% 1.59% 
Custom Work as % of total variable  cost  4.95% 4.47% 4.23% 
Total Variable costs  $59.99  $59.81  $63.03 
Variable cost as % of Total  Cost  38.11% 37.24% 37.45% 
 
 
Spring Wheat (Source: South Dakota Annual Report Farm Business Management Program) 
Average of all Fields  10 year 
average 
5year 
average 
3 year 
average 
Fertilizer as % of total variable  cost  47.19% 50.64% 49.97% 
Chemicals as % of total variable cost  17.91%  14.96%  14.81% 
Seed as % of total variable cost  15.73%  14.68%  15.38% 
Drying as % of total variable cost  0.88%  0.19%   
Crop Insurance as % of total variable  cost  8.61% 8.80% 8.91% 
Other Expense as % of total variable cost  2.68%  2.88%  3.00% 
Special Hired Labor as % of total variable  cost  0.32% 0.50% 0.34% 
Custom Work as % of total variable  cost  7.21% 7.84% 7.88% 
Total Variable costs  $54.87  $57.29  $60.88 
Variable cost as % of Total  Cost  41.30% 40.49% 40.42% 
 
Similarly, for soybeans, data from the Farm Business 
Management program show that South Dakota 
producers’average variable costs of production are 
approximately 40% of the ERS forecast for U.S. 
major field crops.  Like the situation for corn, South 
Dakota producers have been increasing the dollar  
 
expenditure for producing soybeans, but the 
percentage of total costs allocated to variable cost 
items has consistently been approximately 37% of 
total costs of production.  For South Dakota 
producers, the percentage of variable costs being 
allocated to fertilizer has increased slightly over time  
 
 
while the percentage of variable costs being allocated 
to chemicals has been decreasing.  One hypothesis is 
that with innovations in seed technology, producers 
are able to plant Round-Up Ready
® soybeans and 
alter their application of chemicals.  Contrasted to the 
situation for corn production, South Dakota producers 
are shown to be spending a lower percentage of total 
variable costs for soybean crop insurance on a per 
acre basis. 
 
For spring wheat, data from the Farm Business 
Management program show South Dakota producers’ 
average variable costs of production are 
approximately 70% of the ERS forecast for U.S. 
major field crops.  Like the situation for the other 
major spring crops, South Dakota producers have 
been increasing the dollar expenditure for producing 
spring wheat.  However, the percentage of total costs 
allocated to variable cost items has consistently been 
approximately 40% of total costs of production.  For 
South Dakota producers, the percentage of variable 
costs being allocated to fertilizer has remained 
consistent at approximately 50%, while the 
 percentage of variable costs being allocated to 
chemicals and seed has been consistently 15% over 
the last five years. 
 
Cost of production estimate information is available 
to assist South Dakota producers with their spring 
planting budgeting process and can be found on the 
SDSU Extension Economics web site at 
http://econ.sdstate.edu/Extension/otherlinks.htm. 
Templates of cost of production budgets for major 
spring crops are available with space provided for 
producers to complete the budget using their own 
figures based on their actual production history.  
These budgets and information provided in this article 
should be useful to producers as they finalize their 
spring planting intentions. 
 
************************************************************ 
ECONOMICS COMMENTATOR 
*********************************************************************************** 
Economics  Department     
South Dakota State University     Phone: 605-688-4141 
Box 504   Scobey Hall        Fax:   605-688-6386 
Brookings, SD 57007-0895          E-Mail: Penny_Stover@ sdstate.edu 
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Box  504              
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Production Costs

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Production Costs

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Research Papers in Economics