A preliminary assessment of the applicability of full cost, life-cycle accounting and pricing to agriculture demonstrates both the possibilities and the problems in practical and theoretical terms.
In this paper, we first elaborate a method for analyzing full life-cycle costs and consider some of the public policy implications of its use. We then take a brief look at historical problems resulting from the lack of full cost, life-cycle pricing in agriculture and review contemporary proposals for internalizing some costs through anti-dumping policy and the new Uruguay Round rules of the GATT.
On page eight, we begin the case study: applying our method of analysis to spring wheat grown in the upper Midwest region of the United States. We recognize that this case study is not a definitive method for internalizing costs. The assumptions of any full cost, life-cycle pricing analysis will inherently include only those costs recognized by the modeler. For example, we included the costs of health care to farmers in our spring wheat case study because it is a factor of much debate in the U.S. But we excluded the equally important societal costs resulting from the dumping of cheap wheat in developing countries. Had we included these societal costs, a very different set of numbers would describe the full cost of spring wheat production for the Northern Plains. While this case study only looks at one crop from one region guided by a limited set of parameters, lessons from this example can be extrapolated for agriculture and other industries as a whole.
Finally, we present a few recommendations and a brief conclusion. Four appendices are attached at the end documenting the figures used in this analysis.
A comprehensive life-cycle accounting requires the application of the following steps to each component of a product and each input used in its process of production.
Determining the Direct Costs of Production: The first step is adding together what is currently spent by producers.* These are the visible direct costs. The second step is identifying and adding in all of the hidden direct costsóthose costs covered primarily by various units of government. The third step in this phase is to identify and estimate the postponed direct costsólargely the ecological or social problems that will have to be compensated for in the future.
Adding these three together for each component or input provides an estimate of the full, life-cycle, direct costs of production. †
Step One Determine the visible costs of producing, using and disposing of all components of and inputs to a particular item
Step Two Identify and add in the hidden costs
Step Three Identify, estimate and add in the postponed costs
It is clear to see that each stepis very complicated, permitting only rough estimates at best. Estimates, however, can be powerful tools for analysis and policymaking.
Political demands for pricing products and services at their full cost of production, use, and disposal are coming from two distinctly different groups. The first group, made up largely of environmental organizations, believes that all costs of a specific item must be charged to consumers to make sure that they are receiving appropriate market signals.
Unless the full ecological costs of petroleum-powered transport are included in the price of gasoline, they argue, consumers will go on buying gas-guzzling cars and ignoring public transportation. Advocates of this perspective are primarily concerned with using full cost pricing to alter consumer behavior: they believe government policy creating higher prices or taxes will in turn lead to a decline in consumer purchases and therefore a reduction in total ecological or social costs.
A second group making the political demand believes that the lack of full cost pricing affects producer behavior. According to this group, it leads to unfair competition for those producers who are trying to "do the right thing." By more fully incorporating the expense of environmental protection and restoration or the expense of providing decent working conditions, wages, and benefits in their business practices, these producers increase their direct costs.
For example, if a "responsible" owner pays for cleaning up all of the air and water pollution created by her factory but another owner does not spend one penny on clean-up, the polluter is likely to have a lower cost of production. If an "irresponsible" agribusiness firm uses child labor to produce tomatoes in Honduras while a family farmer in Ohio hires union farmworkers, the lower labor costs in Honduras will give the agribusiness firm an unfair competitive advantage. If one farmer provides medical insurance benefits to his employees while another one does not, the "responsible" employer will be less competitive.
This group argues that without full cost, life-cycle pricing, products sold on local, national or international markets will be unfairly low-priced, forcing producers who are (by choice or by law) internalizing ecological and social costs out of business or creating a powerful disincentive for any further cost internalization. Those sharing this perspective are primarily concerned with ways that full cost, life-cycle pricing can protect and reinforce "good" behavior by producers.
Full cost, life-cycle analysis provides information needed by policymakers to understand current pricing structures and their financial, ecological, and social impacts on both producers and consumers. From this understanding, they can design policies (laws/regulations) based on whatever mix of policy objectives chosen to achieve certain goalsósuch as economically, socially and environmentally sustainable agriculture.
The lack of full cost pricing goes back thousands of years. Following is a description of the problem in the first and second century B.C. in the Roman Empire, taken from a book published by the Quaker Oats Company in 1927 entitled Grain Through the Ages:
One reason for the decline of grain farming in Italy was the importation of grain into Rome from the rich grain lands of Sicily and Egypt. In Sicily these grain lands had been appropriated by rich men and scheming politicians who farmed them with slave labor. As a result the markets of Rome were flooded with cheap grain. Grain became so cheap that the farmers who still owned small pieces of land could not get enough money for the grain they raised to support their families and pay their taxes. They were forced to turn their farms over to rich landowners. On the land of Italy slave gangs working under overseers took the place of the old Roman farmers, the very backbone of the state.
The farmers, after their land had been lost, went into the city walls, leaving the scythe and the plough. They worked now and then at a small wage. They ate mostly bread made of wheat which was distributed to them by any politician who wanted their votes at an election. They lived in great lodging houses three or four stories high.
The land itself became poor. The use of slaves meant that the land was badly worked because usually the slaves did as little as they possibly could unless they were under the eye of the overseer.
The long-term costs of improper pricing policy was enormous: some believe it was a key factor in the downfall of the Roman Empire. This example from ancient Italy highlights many of the concerns we still face today. The importing of grain from regions where it is being produced at lower costs drives down market prices, eventually pushing small farmers off their land. They move into the cities, where they live off welfare manipulated by politicians. Their small farms are consolidated into huge estates with absentee owners. In the end, the land itself is destroyed by this economic process.
In recent years, demands for full cost accounting in agricultureófrom the perspectives of both consumer and producer behavioróhave become common. For example, participants at the first International Farm Crisis Summit, held in Ottawa, Canada in 1983, attempted to enact full cost accounting in international trade with the following resolution:
Equity of world trade is parity of trade. It would simply enforce tariffs and deny raw materials or finished and unfinished goods to enter any country at a price less than parity prices plus freight. The collected tariff will not go into the government treasury, but into a Special Drawing Rights for the exporting nation. The entity that imports the foods or raw materials will pay the difference between the cost of producing the country imported from the production costs in the importing country.
At the national Farmers and Ranchers Congress held in the United States in 1986, representatives from all over the nation unanimously approved the following:
Whereas, The intensification of production has included the plowing and planting of unsuitable land, including wetlands, fragile prairies, and other highly erodable land causing severe soil erosion;
Whereas, This intensification of production has included the overuse of fertilizers and chemicals, often resulting in contamination of our water;
Whereas, Insufficient farm income makes it impossible for family producers to maintain adequate conservation measures on their land;
Be it Resolved, Producers must receive a great enough return for their crops and livestock to maintain and improve soil and water conservation measures, in addition to covering costs of production and family living.
In the first meeting of farmers from around the world to address the rewriting of global trade rules under the Uruguay Round of the General Agreement on Tariffs and Trade (GATT), held in Geneva in December of 1987, delegates called on negotiators to approach full cost accounting in the following way:
Major (food) exporters must agree to a 'cease-fire' in the export dumping war, including negotiations on market shares based on an agreed upon representative time period and the establishment of minimum export reference prices, which should reflect a fair return to producers, including the costs of maintaining appropriate sustainable production practices.
There are two contemporary initiatives underway to address the lack of full cost pricing for agricultural products in the World Trade Organization (WTO). Governments and non-governmental organizations are also debating other more comprehensive approaches in various international fora.
The first approach is through traditional trade policies called "anti-dumping laws." Article 6 of the pre-Uruguay Round GATT specifically prohibited dumping, which is defined as the export of goods at prices below the cost of production including the costs of marketing and a fair return or profit. (The Uruguay Round created some loopholes and closed others but this provision is largely unchanged.)
To enforce Article 6, most countries have national laws which place countervailing duties against dumped goods to bring the exported price up to the "full cost" of production. In order to do so, however, it is necessary to establish exactly which of the visible, hidden, postponed and secondary costs of production are going to be considered in the technical determination of dumping violations. Is it enough to only consider the visible expenses and to ignore the hidden and postponed costs, or should some or all of these be added together in this evaluation?
The second approach is very new, first attempted in the Uruguay Round of GATT negotiations on agriculture. In this approach, all taxpayer-paid costs of production for agricultural products have been identified and listed with a specified financial value in a formula called the "Aggregate Measure of Support" or AMS. Everything from easily quantified water and fertilizer subsidies to more complex items such as the value of government-paid maintenance of inland waterways are included. The purpose of the AMS is to monitor and enforce the phase-out of government support for production. Unfortunately, this formula is not being used to measure or address export dumping, but it is likely to be invoked in trade disputes in the future.
The formula for the AMS could aid in the determination of hidden costs and dumping violations, but it is seriously flawed in two respects. First, it uses an arbitrarily selected "world price" as the baseline reference point; this is a very low "dumping" price that excludes many of the visible costs as well as virtually all hidden, postponed and secondary costs. Second, the AMS reveals hidden costs but continues to exclude virtually all postponed and secondary environmental and social costsóprecisely those costs which many farm groups and environmentalists demanded be included in order to achieve the goal of economically and ecologically sustainable agriculture practices.
Nonetheless, the AMS formula can be a tool for identifying some of the hidden costs. This information can be used to help devise policies for reducing the secondary costs of production and better allocating revenues so as to reduce taxpayer costs. At the same time, the AMS can help to identify some of the unpaid, postponed costs that are impossible to add in through pricing in the normal mechanisms of the capitalist agriculture market.
In Geneva in June 1994, the GATT hosted its first (ever) symposium with non-governmental organizations to consider the internalization of costs as an environmental measure in trade policy. Meanwhile, the Organization for Economic Cooperation and Development (OECD), the think-tank of the 25 industrialized countries of the world (now including Mexico), has created two working groups to study the issue: one is considering the impacts of economic instruments and environmental subsidies in trade policy, the other is looking at the mechanics of life-cycle analysis.
The case study discussed in the following pages is a preliminary assessment of the application of full cost, life-cycle analysis to agriculture. Farmers in the Northern Plains region of the upper Midwestern part of the United States (including the states of North Dakota, South Dakota, Minnesota, Montana, and Wyoming) are responsible for 91 percent of U.S. spring wheat production. Given this concentration of production, spring wheat was chosen as the specific crop for this study. The data and results of this preliminary assessment can be found in the Appendices at the end of this article.
As discussed in the "Methods" section above, the direct costs of production are the sum of all the visible, hidden and postponed costs that can be identified and estimated. From the data available, our best projection of the total direct full life-cycle costs of production for one bushel of spring wheat is $8.05 per bushel in the Northern Plainsóand even higher nationwide. (See Appendix A.) It is significant to note that the cost is over twice the per bushel price most farmers have been receiving for their wheat in the market.
Step One - Visible Costs of Production: The Economic Research Service (ERS), a branch of the U.S. Department of Agriculture, produces a Costs of Production study each year which summarizes the visible expenses incurred by farmers from the time they purchase planting materials to their "first point of sale" after harvest. ERS figures show that farmers in the Northern Plains spent a total of $6.17 per bushel (roughly $230 per ton) in 1990 to grow and harvest spring wheat. (See Appendix B.)
Included in the ERS report are annual expenses covering approximate seed and fertilizer costs, the costs of purchasing, running and repairing equipment, and the cost of hired labor. (See Appendix B for definitions for each of these categories and the calculation of their costs, as indicated by the column entitled "Notation.") These annual expenses were estimated in the 1990 ERS study to be about $1.33 per bushel of the total $6.17.
But farmers, like other self-employed business owners, also incur fixed ownership costs, such as capital replacement, land, interest on real estate, interest on operating loans, unpaid labor, taxes and insurance, operating capital, and general farm overhead. (See Appendix B.) Spring wheat farmers in the Northern Plains spent approximately $4.84 per bushel in 1990 to own their farms and produce their crops.
The ERS study excluded some costs, however. The ERS figures do not measure marketing costs farmers must pay before selling their cropsóon grounds that marketing expenditures, such as grading and drying fees, are not true costs of production but rather expenses which farmers choose to pay for marketing their grain.
But farmers must pay grading and drying fees in order to sell their crops at the market to grain exporters, flour producers or feed lots. Grading certificates are often necessary at the time a sales contract is established by a farmer with his/her local elevator or is later charged to the farmer. State grading services charge farmers approximately $.02 per bushel of spring wheat for the grades. Drying fees, which farmers throughout the Midwest were forced to pay in 1991 - 1993 because of heavy rainfall, cost farmers another $.03 per bushel.
Nor do the ERS figures consider the cost of health care for the farming profession. Farmers in Minnesota currently pay about $0.23 per bushel for basic health care insurance. In the future, if certain national health care policies are approved by the legislature, U.S. family farmers as small business owners may be required to pay health insurance for any hired workers. This policy will add significantly to direct farm costs.
After adding in marketing and health care costs ignored in the ERS study, spring wheat farmers' estimated direct cost of production in the Northern Plains is $6.45 per bushel, around $240 per ton. (See Appendix B.)
Step Two - Hidden Costs of Production: In addition to these visible expenses, there are a wide range of unseen, government-paid expenses associated with U.S. spring wheat production. It is very difficult to determine the precise value of all of the services provided by each and every government agency, but a great deal of this work has been done by the U.S. federal government in order to implement the U.S.-Canada free trade agreement in 1989.
That year, the U.S. government estimated the value of all government subsidies* for wheat production in 1987. Taking the exact figures from the government's Aggregate Measure of Support tables for the U.S.-Canada free trade agreement, we find $5.31 billion dollars of total government support (see Appendix C, Item VII in the accompanying table entitled "U.S. Government Support for Wheat, Barley and Oats") contributed to the production of 57.36 million metric tons of wheat (see Appendix C, Item I in the accompanying table). Thus, the net subsidy is $92.52 per ton. Dividing this figure by 37 bushels per ton, the hidden cost per bushel is $2.50. (See Appendix C. Note: At the time of this writing, these are the latest figures available; they have not been adjusted for inflation.)
Step Three - Postponed Costs of Production: The precise determination of postponed social and ecological costs is an area of economic analysis that is quite new, but there is some research available that gives a general sense of the environmental costs of a bushel of wheat produced in the United States.
A good source based upon official data is the book by Herman Daly and John Cobb, For the Common Good: Redirecting the Economy Toward Community, the Environment and a Sustainable Future, published by Beacon Press in Boston in 1972. In some cases, we simply adjusted Daly and Cobb's figures for the 1990 production year, and in others, we expanded on the authors' original models to produce examples that specifically reflect the cost of spring wheat production in the Northern Plains states.*
Following is a summary of the key postponed ecological costs, followed by a brief explanation of each of the figures. (See Appendix D.)
Cost of Ecological Damage Cost per bushel in ($) 1990
Soil erosion $ .02
Soil compaction $ .12
Loss of wetlands $ .02
Pollution from diesel fuel $ .01
Water pollution $ .49
Total $.66 per bushel,
nearly $24.20/ metric ton
A combination of the data available from the Soil Conservation Service and the World Resources Institute shows that the Northern Plains lost approximately 7.4 tons of topsoil per acre per year between 1982-1992. We applied this figure to the total amount of topsoil present for cropland on average throughout the Northern Plains states and found that the soil for this region erodes at around .2 percent per year. To calculate the dollar value of this eroded land, we multiplied the erosion rate by the average price per acre of land. This calculation results in a soil erosion cost of $.61 per acre or $.02 per bushel.
R. Neil Sampson, in his book Farmland or Wasteland, (1981), estimated that the value of soil productivity lost in 1980 due to soil compaction on farms was $3 billion. Daly and Cobb assumed that this value increased 3 percent per year, which brings the total cost of soil compaction across all U.S. farmland to $4.03 billion in 1990. We divided this figure by the total number of acres of farmland in production that year and found the average cost per acre of soil depletion from soil compaction to be $4.30 per acre; or $.12 per bushel in the Northern Plains.
Daly and Cobb in 1972 estimated the cumulative value of the services lost from an acre of abused wetlands to be $600. This value includes the cost of flood protection, water purification, provision of wildlife habitat, aesthetics and consumers' surplus. Adjusted for inflation using the Producer Price Index, the value of services lost from an acre of wetlands becomes $1,492 per acre through 1990. We can reasonably assume that farmers in the Northern Plains began filling in wetlands during the 1920s when the United States experienced its first major peak in its number of farms. Dividing $1,492 by 70 years, we find the annual value of wetlands lost to be $21.31 per acre.
A 1991 U.S. Fish and Wildlife Service report to Congress, Wetlands: Status and Trends, shows that more than 10 million acres of wetlands have been lost to date throughout the Northern Plains. Of this, the U.S. Fish and Wildlife Service estimates that the conversion of wetlands to agricultural production accounted for 87 percent of the wetland losses, or 9 million acres. Multiplying this as a percent of the land in use in 1990 by the estimated wetlands value of $21.31 per acre, we find that the average cost per acre of lost wetlands in 1990 is $.64, or $.02 per bushel.
We multiplied this treatment cost by the estimated total number of river miles contaminated by agricultural production to find that they would cost approximately $3.65 billion to treat. Wheat farms comprised 7.8 percent of all agricultural land counted in the EPA study. Therefore, if all the rivers polluted by wheat farms were to be treated, it would cost $284.7 million or $.49 per bushel. This figure is roughly the same for wheat farms in the Northern Plains where 91 percent of U.S. spring wheat is grown.
The cost of treating the lakes and groundwater that have been polluted by farm chemicals has not been included in our estimate of the water pollution costs due to a lack of any credible estimates. It is safe to assume that the annual cost of treating water polluted by farm chemicals would far exceed $.49 per bushel if lake water and groundwater were included. Furthermore, we can assume that the cumulative cost of waterways left untreated would far exceed the amount the state of Ohio paid a decade ago to treat their rivers because for every year pollution is left untreated, its damaging effects multiply.
According to the U.S. Department of Energy, on the average, 10 percent of each barrel of crude oil ends up as diesel fuel. Each barrel of crude oil is used to produce 4 gallons of diesel fuel, among other fuels. In inflation adjusted dollars, the cost of using a gallon of diesel fuel is $.03. Wheat farmers consumed 140 million gallons of diesel fuel for on-farm activities, according to the U.S. Department of Agriculture, National Agriculture Statistics Service's "Farm Production Statistics" (1990). On a cost per bushel basis, the figure rounds up to one cent per bushel.
Given these numbers, the financial cost of using diesel fuel for every single bushel of production is negligible. However, this cost does not include the environmental cost of oil extraction or the environmental risk involved in transporting oil. Therefore, Daly and Cobb suggested simply charging consumers a flat rate per gallon of fuel consumed and depositing that in a non-interest-bearing account for future generations to use to pay for the future environmental damage caused by our use of non-renewable sources of fuel.
Added together, these postponed costs amount to $.66 per bushel. (See Appendix D.) Along with the visible and hidden costs explained above, the full direct costs for a bushel of spring wheat in the Northern Plains of the U.S. is $9.61. (See Appendix A.)
However daunting the problems, full cost, life-cycle analysis can be used in ways that are obviously beneficial for everyone involved. While it is clearly not appropriate to simply add the direct and secondary costs of production together and then put a higher price tag on the consumer item, the information gleaned from such a method of accounting can be used to evaluate public policy choices and chart directions for further research.
By examining the ledger of a full life-cycle cost analysis, even a preliminary assessment such as this one, it is possible to identify the kinds of impacts which are the most costly and which, therefore, should be the first target of public policies. On this basis, we make the following recommendations:
equipment, prohibiting toxic chemicals, and improving public education; and
Any new economic concept takes decades to develop and mature. Full cost, life-cycle accounting and pricing is no exception. As it is now developed, it cannot be used without risk: for example, incomplete analyses can confuse the public policy debate and inadvertently increase postponed and secondary impacts.
Further study is needed to design analytical tools that can help identify and estimate the secondary costs of production resulting from mis-allocated revenues from commercial agriculture, in both domestic and international contexts. Internationally, mechanisms for allocating revenuesósuch as the commodity agreements for coffee, cocoa, rubber, timber and so onóare particularly convoluted and prone to abuse, leading to serious mis-allocations which again add to postponed and secondary costs and social and ecological problems.
On the other hand, there is a great deal of important information that can be developed in the course of pursuing a full cost, life-cycle analysis that can then be used to make solid public policy decisions. Flawed as it may be, or underdeveloped, it would be impossible to move forward on a number of key objectives, especially toward more economic and ecologically sustainable agriculture and rural communities, without the information that is being derived from these early attempts to further develop the concept.
In this paper, we attempt to establish a method for approaching full cost, life-cycle analysis for a specific product. In the case of spring wheat, this method led us to findings with certain implications for policy which are expressed in the "Policy Recommendations" above. More broadly, this analysis leads us to conclude the following:
This paper is only another step, but hopefully one that both highlights
the valuable tools and information that we can begin using and
points out the areas of underdevelopment which could create problemsóunless
we use this new tool with care.
TOTAL DIRECT COSTS.
| Spring Wheat Production Costs | ||
| TOTAL DIRECT COSTS | ||
| Year: 1990 | ||
| Total visible costs (Appendix B) | ||
| Total hidden costs (Appendix C) | ||
| Total postponed costs (Appendix D) | ||
| TOTAL VISIBLE, HIDDEN, POSTPONED DIRECT COSTS |
| Spring Wheat Production Costs | ||||
| VISIBLE DIRECT COSTS | ||||
| Year: 1990 |
| |||
| ANNUAL VISIBLE COSTS | ||||
| Seed | ||||
| Fertilizer | ||||
| Lime and gypsum | ||||
| Chemicals | ||||
| Custom operations + technical services | ||||
| Repairs | ||||
| Fuel/lube/electricity | ||||
| Purchased irrigation water | ||||
| Labor: hired | ||||
| TOTAL ANNUAL VISIBLE COSTS | ||||
| FIXED VISIBLE COSTS | ||||
| Capital replacement | ||||
| Land | ||||
| Interest on real estate | ||||
| Interest on operating loans | ||||
| General farm overhead | ||||
| Unpaid labor | ||||
| Taxes and insurance | ||||
| Variable cash expenses | ||||
| Operating capital | ||||
| Other non-land capital | ||||
| Negative returns to management | ||||
| TOTAL FIXED VISIBLE COSTS | ||||
| SUB TOTAL ERS ANNUAL & FIXED VISIBLE COSTS | ||||
| Drying fees | ||||
| Grading fees | ||||
| Health care | ||||
| SUB TOTAL NON-ERS VISIBLE COSTS | ||||
| TOTAL VISIBLE DIRECT COSTS |
FULL COST ACCOUNTING DEFINITIONS - VISIBLE DIRECT COSTS
(Numbers correspond to "Notation" column of the spread sheet.)
Note: USDA Departments abbreviated as: FCRS= Farm Costs and Returns Survey; NASS= National Agricultural Statistics Service; ERS= Economic Research Service.
Calculations: Northern Plains : North Dakota, South Dakota, Minnesota, Wyoming, Montana. Spring Wheat Yield per Acre Average of Northern Plains States: ND=36, SD=32, MN=49, WY=28, MT=22. Average: 33.4 bushels per acre. Total Bushels per State: ND=277,200,000; SD=67,200,000; MN=134,750,000; WY=168,000; MT=53,900,000. Total of Northern Plains combined: 533,218,000. Total of all U.S.: 583,124,000. Percent of all spring wheat in the U.S. produced in the Northern Plains: 91%.
__________________________________
1-Seeds: Includes purchased seed, sets, plants, seed cleaning treatments and trees. Data were originally collected by the FCRS and the NASS. The FCRS determines seed varieties used, their rates and proportions. The NASS furnished commercial seed prices in 1990 dollars. Homegrown seed was valued in 1989 average price plus an allowance for cleaning and treating.
2-Fertilizer: The ERS calculated fertilizer costs for wheat by multiplying prices per pound of the primary nutrient, by the pounds of nutrients applied to the crop. Nutrient prices were calculated by weighting prices of fertilizer by the amount of each nutrient in each commercial fertilizer mixture used in each state. Prices and compositions of commercial fertilizers are calculated by the USDA National Agricultural Statistics Service.
3-Lime and Gypsum: Figure taken from average cost estimated by the ERS. Both are used in neutralizing and treating the soil.
4-Chemicals: Calculated by ERS based on crop production expenses in specialized reports from the FCRS. Includes expenses for insecticides, herbicides, fungicides, nematicides, defoliants, fumigants, growth regulators and custom aerial spraying, materials for frost protection and biological pest controls.
5-Custom Operations: Expenses are calculated from cost-of-production estimates produced by the FCRS. Operations include: labor and machines as a unit hired to perform specific farm operations such as combining; grain hauling to elevator; spraying and bailing.
6-Repairs: The ERS report based repair costs on the average number of hours a machine was used. ERS calculated the total accumulated repairs for each machine based on the list price and age of the machine and engineering relationships measured in Nebraska tractor tests. Total accumulated repairs for a machine were then divided by an estimate of the total accumulated hours that the machine had been used. The resulting repair rate per hour was multiplied by the number of hours the machine was used in crop production.
7-Fuel/Lube/Electricity: These costs were estimated by the ERS department to measure the power needed to operate tractors, harvesters, trucks, pickups and irrigation pumps. ERS estimates fuel lubrication and electricity costs from FCRS and engineering performance data. Hours of use were based on speed and field efficiency to determine the number of hours of use per acre. Hours of use were then multiplied by a fuel consumption rate related to the size of the machine and the type of fuel. Electricity costs were based on the price of pumping irrigation water: the well; pump; motor size and number of hours water was pumped.
8-Purchased Irrigation Water: The ERS calculated the cost of water purchased from irrigation districts and the cost of pumping private association water. The cash costs of pumping water from a producer's own wells are included in fuel, lubrication and electricity, repairs and labor. Data on expenses for purchased water came from the FCRS.
9-Labor-Hired: The ERS estimated the cost of hired farm labor from producer estimates of the portion of whole-farm cash expenses for labor. Expenses include: contract labor; cash wages; bonuses and the estimated value of noncash benefits.
10-Capital Replacement: The ERS calculated costs for machinery, vehicles and irrigation equipment based on per-hour rates and the value of each machine and on the hours per acre that each is used in production. The ERS calculated hourly capital replacement per machine by dividing the new purchase price of a machine, less salvage value, by the hours the machine was used. Hourly-use estimates for farm machinery, vehicles and irrigation equipment are used per crop acre from FCRS data on sizes, acres covered, miles driven, water applied and performance data.
11-Land: ERS allocated a net return to land based on its rental value in the production of a particular crop. The rental value is a composite of cash and share rental values.
12-Interest on Real Estate: The ERS included interest and service fees on farm business loans, land contracts and other loans secured by real estate. Data on interest expenses came from whole-farm questions asked annually in the FCRS.
13-Interest on Operating Loans: The ERS included finance charges and service fees on loans for machinery, the farm share of motor vehicles, fertilizer, seed, chemicals and other inputs. Service fees include: fee on CCC loan redemption and registration and license for motor vehicles.
14-General Farm Overhead: This figure calculated by the ERS includes the following farm expenses: electricity and non irrigation water for general farm use; telephone; farm shop and office equipment and supplies; fence maintenance and repairs; water drainage; farm share of motor vehicle registration and licensing fees; accounting and legal fees; business travel; dues for memberships in farm organizations; farm share of liability and blanket insurance policies; and herbicides used to maintain farm roads and ditches.
15-Unpaid Labor: Unpaid hours calculated by the ERS include the operator's time, if they were not paid a cash wage, and the time of all other unpaid workers. Hours of crop labor established from producers' estimates of average unpaid hours worked per week and the percentage of the unpaid time for that crop. ERS assessed the hours of unpaid labor at the agricultural wage rate plus an allowance for the employer's share of Social Security. Average wage rate for hired farm workers during 1990 was $5.54/hour.
16-Taxes and Insurance: Taxes on a crop enterprise are estimated on machinery and on farm real estate. ERS calculated the tax cost for each machine based on the current purchase price of the machine, lagged 4 years to represent an average age and an average tax rate for agricultural machinery. ERS estimated taxes on farm real estate by dividing the total annual real estate taxes paid by the acres of farmland owned. ERS also estimated the annual insurance charge for machinery in a manner similar to taxes on machinery.
17-Variable Cash Expenses: These reflect the inherent ownership costs of variable inputs as calculated by the ERS.
18-Operating Capital: The ERS estimated returns to operating capital by multiplying the value of inputs that are used up in production (seed, fertilizer, fuel) by the time between their use and harvest and by the cost of capital, which is the average interest rate on 6-month U.S. Treasury Bills. During 1990 this interest rate was 7.47%.
19-Other Non-Land Capital: The ERS estimated other non-land capital by multiplying the current value of machinery and equipment used in wheat production by the rate of return to production assets from current income in the farm sector over the previous 10 years. Rate of return taken from : Economic Indicators of the Farm Sector: National Financial Summary, 1990.
20- Residual Returns to Management: The difference between gross value of production and the total of cash expenses except interest, allocated returns to operating capital, other nonland capital, land and unpaid labor is residual returns to management and risk. Because of variability in weather and crop prices, the ERS estimated 1990 residual returns as negative for farmers.
21-Drying Fees: Estimated cost based on North Dakota elevator drying fees, which include capital depreciation and electricity to run dryer. Cost determined for 1992 and adjusted for inflation. It should be noted that drying is not usually necessary for wheat, however in extremely wet years it is a cost that must be included.
22-Grading Fees: Based on single truck probe at North Dakota and Minnesota State Inspection offices for 1992 and adjusted for inflation. Full grades include: test weight; moisture; dockage; damage and protein. % Dark, Hard, Vitreous (DHV) not included.
23-Health Care: Estimate based on research conducted by
Minnesota Rural Futures Organization. Cost reflects 1992 prices
adjusted for inflation. Health care defined as cost of basic premium
only ($500 per month for an insurance policy with a $1000 deductible).
HIDDEN DIRECT COSTS.
| Spring Wheat Production Costs | ||||||
| HIDDEN DIRECT COSTS | ||||||
| Year: 1990 | ||||||
| HIDDEN COSTS | ||||||
| Other costs (see attached data) | ||||||
| TOTAL HIDDEN DIRECT COSTS | ||||||
(Numbers correspond to "Notation" column of the spread sheet.)
Note: USDA Departments abbreviated as: FCRS= Farm Costs and Returns Survey; NASS= National Agricultural Statistics Service; ERS= Economic Research Service.
Calculations: Northern Plains : North Dakota, South Dakota, Minnesota, Wyoming, Montana. Spring Wheat Yield per Acre Average of Northern Plains States: ND=36, SD=32, MN=49, WY=28, MT=22. Average: 33.4 bushels per acre. Total Bushels per State: ND=277,200,000; SD=67,200,000; MN=134,750,000; WY=168,000; MT=53,900,000. Total of Northern Plains combined: 533,218,000. Total of all U.S.: 583,124,000. Percent of all spring wheat in the U.S. produced in the Northern Plains: 91%.
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25-Other Costs: According to the same 1986/87 support figures calculated by the U.S. government, all other support subsidies, not including deficiency payments, paid to producers totaled $2.02 billion. Based on production estimates for this period of 57.36 million metric tons, the total of all other support payments is equal to $0.94 per bushel. See the attached tables for a complete list of support measures included in this category.
POSTPONED DIRECT COSTS.
| Spring Wheat Production Costs | ||||
| POSTPONED DIRECT COSTS | ||||
| Year: 1990 | ||||
| POSTPONED COSTS | ||||
| Loss in soil production: | ||||
| Soil erosion | ||||
| Soil compaction | ||||
| Water pollution | ||||
| Loss of wetlands | ||||
| Diesel fuel | ||||
| TOTAL POSTPONED DIRECT COSTS |
(Numbers correspond to "Notation" column of the spread sheet.)
Note: USDA Departments abbreviated as: FCRS= Farm Costs and Returns Survey; NASS= National Agricultural Statistics Service; ERS= Economic Research Service.
Calculations: Northern Plains : North Dakota, South Dakota, Minnesota, Wyoming, Montana. Spring Wheat Yield per Acre Average of Northern Plains States: ND=36, SD=32, MN=49, WY=28, MT=22. Average: 33.4 bushels per acre. Total Bushels per State: ND=277,200,000; SD=67,200,000; MN=134,750,000; WY=168,000; MT=53,900,000. Total of Northern Plains combined: 533,218,000. Total of all U.S.: 583,124,000. Percent of all spring wheat in the U.S. produced in the Northern Plains: 91%.
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26-Soil Erosion: The soil erosion figure was computed by calculating the rate of erosion per acre across the Northern Plains. To do this, the average topsoil erosion per acre was figured as a percent of the total topsoil thickness and density per average acre of soil. Soil thickness and density are computed by the Natural Resources Soil Conservation Service for each state. The soil samples used by NRSCS to measure thickness and density were taken from a cross-section of about 20 common cropland soil types for each state between 1982-1992. (These figures do not differentiate between acres on which continuous versus rotational growing methods were used.) Topsoil thickness for farmland measured 12 inches in Minnesota; 6 inches in Montana; 7 inches in North Dakota; 6 inches in South Dakota; and 8 inches in Wyoming. Respectively, bulk density equalled 1.32 grams per cubic centimeter, 1.15 gms/cc, 1.45 gms/cc, 1.25 gms/cc, and 1.20 gms/cc.
We converted the soil thickness and density measured in cubic centimeters to tons per acre and then divided into the acreage soil loss due to wind and water erosion to determine the rate of erosion. The average annual rate of soil erosion across the Northern Plains during this 10-year period is equal to .2 percent.
The rate of erosion was then multiplied by the average land value per acre throughout the Northern Plains states to determine the dollar value of eroded soil. Average land values for Minnesota, Montana, North Dakota, South Dakota and Wyoming in 1990 were $619, $201, $299, $278 and $126 respectively. Therefore the total cost of soil erosion using this method of calculation totals $.73 per acre or $.02 per bushel.
27-Soil Compaction: After adjusting the soil compaction figures generated by R. Neil Sampson for inflation and cummulative compaction as suggested by Daly & Cobb, we found the the value of soil productivity lost to compaction throughout the United States to equal $4.03 billion. Dividing the total value of soil productivity loss by the total number of acres farmed in the United States produces the total cost of soil compaction per bushel in the Northern Plains:
$4.03 billion $4.034
.998 billion acres = $4.034/acre AND 33.4 yield / acre spr. wht.
= $.12/bu.
28-Water Pollution: The U.S. Environmental Protection Agency states in its report, "National Water Quality Inventory: 1990 Report to Congress," that pollution from cropland, pasture and rangeland was responsible for contaminating 103,439 miles of U.S. rivers. The report also calculated that it cost $393.7 million over 12 years to treat 929.8 miles of the Ohio River. (Estimates of water treatment costs specific to the Missouri River, which flows through the Northern Plains, are not availble to our knowledge.) Dividing the treatment cost by the number of miles of the Ohio River gave us an average treatment cost of $423,424 per mile over 12 years. We then divided this cummulative cost by 12 to determine the annual treatment cost of the Ohio River. The result equals a cost of $35,285 to treat each mile of polluted water annually.
Wheat farms comprised 7.8 percent of all agricultural land counted in the EPA study; or 8,068 miles. If all the rivers polluted by wheat farms were to be treated, it would cost $284.7 million each year. Dividing this figure by the total number of bushels of spring wheat produced in the countermonious United States, we find that the per bushel cost of polluted rivers from wheat production is $.49 per bushel:
It should be noted that the cost of treating the polluted lakes and groundwater has not been included due to a lack of any credible estimates. It is safe to assume that the annual cost of treating water polluted by farm production would far exceed $.49/bushel if lake water and groundwater pollution were included.
29-Wetlands: Drawing from two sources: Gupta and Foster, "Economic Criteria for Freshwater Wetland Policy in Massachusetts" and Lugo and Brinson, "Calculations of the Value of Saltwater Wetlands," Daly and Cobb in 1972 estimated the value of the services lost from an acre of abused wetlands to be $600. This value includes the cost of flood protection, water purification, provision of wildlife habitat, aesthetics and consumers surplus, and the amount purchasers or beneficiaries of an item or service would be willing to pay above and beyond the actual price. Adjusted for inflation, we calculate the cummulative cost per acre at $1,492.
Next we divided this cummulative value of wetlands lost by 70 yearsóthe average number of years farmers in the Northern Plains have been filling in wetlands. (Note: Official records of the date farmers in Northern Plains states began filling in wetlands is not available. Therefore, we made a reasonable guess as to when farmers in the Midwest must have begun filling in wetlands. We chose 1920 as the year farmers in the Midwest would have begun filling in wetlands because this was the first major peak in farming measured by the number of producers on the land.) The average value of an acre of wetland loss becomes $ 21.31 per year.
The number of acres of wetlands lost to agricultural conversion throughout Minnesota, North Dakota, South Dakota, Wyoming and Montana to date are 5.5 million; 2.1 million; .83 million; .65 million; and .26 million respectively. Dividing each of these by the number of acres of cropland in use in 1990, we estimated that 3 percent of land in use throughout the Northern Plains in 1990 had previously been wetlands. Multiplying this percentage for each state by Daly and Cobb's estimated value of wetlands per acre per year ($ 21.31), we found the average cost of lost wetlands to agricultural production in the Northern Plains equalled $.64 per acre or $.02 per bushel.
30-Diesel Fuel Pollution: The environmental cost of consuming one barrel of crude oil was estimated to be $.50. This figure includes the atmospheric damage caused by carbon dioxide emissions. According to the U.S. Department of Energy, on the average, 10 percent of each barrel of crude oil ends up as diesel fuel. Each barrel of crude oil is used to produce 4 gallons of diesel fuel, among other fuels. In inflation adjusted dollars, the cost of using a gallon of diesel fuel is $.03. Wheat farmers consumed 140 million gallons of diesel fuel for on-farm activities, according to the U.S. Department of Agriculture, National Agriculture Statistics Service's "Farm Production Statistics" (1990). On a cost per bushel basis, the figure rounds up to one cent per bushel.
Given these numbers, the financial cost of using diesel fuel for
every single bushel of production is negligible. However, this
cost does not include the environmental cost of oil extraction
or the environmental risk involved in transporting oil. Therefore,
Daly and Cobb suggested simply charging consumers a flat rate
per gallon of fuel consumed and depositing that in a non-interest-bearing
account for future generations to use to pay for the future environmental
damage caused by our use of non-renewable sources of fuel.
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