A comment was received recently from a reader of our blogs. The reader wanted to know why economists discuss break-even costs and cost of production rather than the return on investment needed to not just break-even but also cover the fixed costs of family living expenses. Let me start by saying thank you to the reader for sending in the question and now let’s see if I can address it.
As the reader correctly pointed out economists often discuss the returns from farming in terms of cost of production. These include the cost of land, seeding, weed & pest control, harvesting, storage, transportation, fuel, fertilizer and insurance. One reason these are discussed is that these activities are relatively well defined and the costs can be estimated with some confidence. For example, estimating the cost of seed, the pounds of seed required per acre, and the equipment required can fairly accurately estimated. Sometimes the number of hours of labor that are required to complete a task are also included. Even for tasks like seeding, there can be a range of differences among Montana farms. The size of equipment is one example. Some may use a 40-foot seeder while others may use a 60-foot seeder. This changes cost of the equipment, the size of the tractor required and the amount of labor required to seed an acre. Some of the tools that economists provide allow farmers to modify the specifics to better fit their operation. Similar variations could be discussed for every task on a farm. Because of these variations, often costs of production are based on the most common practices for a particular area, with some modifications allowed when several common practices are in use. The most common practices are typically used for break-even or cost of production calculations.
The previous paragraph was about what is currently presented. The next questions is why no expand this discussion to include the costs of supporting a family from a farm or ranch income. The reason is that the complexity and range of variations between farm families is enormous. Montana farms and ranches may support 1 or 2 individuals or several families of varying sizes. Some families have children under 18 living at home others do not. Some have off farm income and others do not. Health insurance costs can varies widely with those over 65 receiving Medicare, those with a family member working off the farm may have access to employer sponsored health insurance, other families will be purchasing insurance individually and some with go without. Farm sizes in Montana also vary significantly. Even if a single number could be agreed upon for a “per-person” or “per-farm” cost of living, it would be difficult to assign reasonable an average number of acres to divide by to determine how much “profit” must be obtained per acres to meet a family’s living expenses.
It would be great if a single profit margin could be assigned per acre or per cow to determine whether an operation is generating enough income to support a family. Unfortunately, there are just too many variables the equation to provide that type of answer.