Potato Economics:
Potato Markets, Marketing &
Cost of Production
Potato Science PLSC 490/590
Lecture 20
April 8, 2014
Paul E. Patterson
Extension Agricultural Economist
pattersn@uidaho.edu
http://web.cals.uidaho.edu/idahoagbiz/
Objectives
• A short lesson in economics
• Market-based economies: supply & demand
• Overview of potato markets & marketing
• Overview of developing cost of production estimates
• Uses of cost of production
• Example of Idaho cost of production
2
Economic Overview
• Economic systems answer 3 basic resource allocation
questions:
1- What?
2- How?
3- For whom?
Shall goods and services be produced
• Economic systems:
• Market-based economies (capitalist)
• Centrally planned economies (socialist)
• Mixed
3
Market-based economies: supply & demand set price
Supply
$
P1
Demand
Quantity
Q1
4
Economic Overview
• What are things that you want to know before you
produce a crop?
•
What to produce?
•
Where to sell?
•
When to sell?
• Market Analysis can provide answers to important
questions:
•
Supply & Demand
•
Trends
•
Prices
5
Economic Overview
• Demand Analysis : + & • What factors influence consumer demand for food?
• Consumer tastes & preferences
•
Diet fads (Atkins)
•
Health issues (obesity, fat, acrylamide)
•
Demographic shifts (age, ethnicity)
•
Income level
•
Where meals are consumed (home or away from home)
•
Form of meals consumed (processing and convenience)
•
Price of product and price of substitutes
6
Economic Overview
• Supply Analysis : + & • What factors influence supply?
• Producer preferences & expectations
•
Commodity price and price expectations
•
Price of alternative crops
•
Input prices
•
Technology
•
Government policy & programs
•
Environmental factors
•
Weather, disease, pests
8
Potato Market Overview
• Potato Market Structure & Market Channels
• What markets are available for potatoes and how are
prices determined?
• Fresh: consignment, formula pricings
•
Process
• Frozen: mostly pre-season, collective bargaining
contracts, some open-market purchases
• Dehydration: some pre-season contracts, mostly
sale of washed processes grade from sheds
• Seed: some multi-year & formula prices
10
Source: USDA.
Source: Patterson,
industry sources, USDA.
Source: USDA.
Market-based economies: supply & demand set price
Supply
$
P1
Demand
Quantity
Q1
20
Cost of Production & Supply
Supply
$
.
C3
C2
C1
.
.
Q1
Quantity
Q2
Q2
Cost of Production Overview
• Does cost of production matter?
• Does the market care how much it cost you to raise
potatoes or any other crop?
22
Overview
• Short run – cost of production does not matter
• Long run – cost of production does matter
“Cost of production would have not effect on competitive
price if it could have none on supply.”
John Stuart Mill, 19th century economist
23
Although potato production practices may
be similar among different growers, each
farm has a unique set of resources with
different levels of productivity, different
production problems, and therefore
different costs.
How much does it cost to raise
potatoes?
It Depends:
Acre vs. Cwt
Location
Variety
Farm Size
Storage
Conventional vs. Organic
Water Source & Irrigation System
How much does it cost to raise potatoes
in Idaho?
It Depends:
Idaho 2013 RB Production Costs: no storage
Region
UI CAR Estimates
$/ac
Field-Run
Yield
$/cwt
SWI RB w/ Fumigation
$3,770
530
$7.11
SCI RB
$2,892
410
$7.05
SCI RB w/Fumigation
$3,289
455
$7.23
EI-S RB
$2,563
375
$6.83
EI-S RB w/Fumigation
$2,862
415
$6.90
EI-N RB
$2,360
350
$6.74
Cost to grow, harvest, and sort .
Measuring Cost of Production
• Traditional uses:
Farm-level decisions & analysis
Policy & government program analysis
Performance analysis
Overview of Costs & Returns
• Enterprise budgets
 Commonly used to characterize costs & returns
• What is an enterprise
 An enterprise is any coherent portion of the farm
business that can be separated and analyzed as a
distinct entity (profit center)
 An enterprise uses inputs & incurs costs while
producing either products or services
• Traditional production unit
 Acres (hectares) for crops
 Head for livestock
Overview of Costs and Returns Estimates
• Because CAR estimates are typically structured for an
enterprise, they are frequently referred to as enterprise
budgets
• An enterprise may produce more than one product,
making it difficult to focus only on a single commodity
• Examples:
 A wheat enterprise produces grain and straw
 A seed potato enterprise produces seed and tops
 A dairy enterprise produces milk, calves and cull cows
30
Overview of Costs and Returns Estimates
• An enterprise can be defined broadly or narrowly
 Broad classification: dairy, beef, crops
 Narrow classification: milk, calves, wheat, potato, barley,
sugarbeets, etc.
• An enterprise can be structured differently for different
types of analysis
• Most frequently, an enterprise is defined on a
commodity basis
31
Overview of Costs and Returns Estimates
• CAR estimates can also be categorized by the type of
management system
• Management system combined with a commodity:
 Conventional tillage vs. No-till winter wheat
 Irrigated spring barley vs. rain fed spring barley
 Potato production with or without storage
 Roundup Ready Sugarbeets
• These designations are useful and help avoid confusion
32
Overview of Costs and Returns Estimates
• Time frame of CAR estimates:
 Can be based on historical data – looking back
 Can be projected data – looking forward
• Time Frame of CAR estimates:
 Typically 12 months, or a production cycle
 Can be longer or shorter
 An orchard or a vineyard would require a longer time
period
33
Overview of Costs and Returns Estimates
• Scope of CAR estimates:
 CAR estimates can represent a single farm, the average of a
group of farms in a region or nation, or a composite or model
farm
 USDA often develops an average or composite CAR
estimates to evaluate policies
 Universities normally develop CAR estimates for a
model farm to evaluate alternative technologies and
cropping systems, as well as market opportunities
34
Cost of Production
• Revenue:
Price x Yield
Correspondence between price and yield
Field-run or paid
• Costs:
• Operating (variable)
• Ownership (fixed)
Cost of Production
• Operating costs typically vary directly
with production and involve inputs
consumed in one production cycle
(typically one year):
• seed, fertilizer, chemicals, fuel,
water, labor, etc.
Cost of Production
• Ownership costs typically don’t vary
directly with production and involve
inputs (depreciable assets) lasting more
than one production cycle:
• machinery, irrigation system, breeding
livestock, and sometimes management,
owner/operator labor and land
Cost of Production
• Two basic means of calculating cost of production
1. Farmers allocate costs based on accounting records
• Track, accumulate and then allocate costs
• Structure of chart of accounts is critical
• Some costs can easily be assigned to a given crop or
field, while other costs cannot
• Allocation procedures are needed
• Machinery operating expense: fuel, repairs, etc.
• Machinery ownership costs
38
Cost of Production
• Two basic means of calculating cost of production
2. Universities Generate Costs
• Budget generator software “generates” cost for field
operations specific to a crop
• Machinery operating expenses are generated for
each operation and accumulated for the enterprise
• Labor, fuel, repairs and ownership costs
• Difficult to calculate enterprise specific
“overhead” expenses, such as legal, accounting,
utilities, etc.
39
U of I Cost of Production Estimates
• Historical not projected
• Crop costs & returns estimates “published” biennially in
odd-numbered years
• 75 - 80 crop enterprise budgets
• 4 regional areas:
• Northern
• Southwestern (Treasure Valley)
• Southcentral (Magic Valley)
• Eastern Idaho
• Dryland & Irrigated
40
U of I Procedures & Assumptions
• Typical or representative costs of production
estimates, not average
• Based on grower surveys, sequence of
operations, not cost data from growers
• Model farm for each region or sub region
41
U of I Procedures and Assumptions
• Economic costs, not accounting (cash) costs
• Opportunity cost (market value)
• Machinery: 75% of replacement cost new
• Management: 5% of total costs
• Overhead: 2.5% of cash operating expenses
• Land: crop specific 1-year cash rental value
• Surface water, avg. price by region
• Pressurization only, per acre-inch water applied
42
U of I Crop Budget Format
• Portable Document Files, or PDFs
• 8 – 14 page format
• Background & assumptions page
• Cost per acre with detailed list of inputs, quantities &
prices
• Cash flow and machinery summary
• Sensitivity analysis
• Ranging analysis
• Monthly storage costs (potatoes only)
43
U of I Crop Budget Format
• Excel spreadsheets
•
•
•
•
Cost per acre with detailed listing of inputs
Sensitivity analysis
One crop per worksheet
One file per region or sub-region
• Crop Enterprise Budget Worksheet data files
•
•
•
•
Cost per acre with detailed listing of inputs
Sensitivity analysis
One crop per worksheet
One file per region or sub-region
44
U of I Crop Budgets Yields
• Generally based on above average management
and are consistent with input use
• Based on farm surveys, USDA county or regional
yields, as well as expert opinions from extension
specialists, county extension educators,
fieldmen, etc.
45
U of I Crop Budgets Input Prices
• Based on regional surveys conducted annually
• Northern Idaho
• Southwestern Idaho
• Southcentral Idaho
• Eastern Idaho
• Chemical fertilizer dealers, seed dealers,
irrigation districts & canal companies, fuel
distributors
• Published as AERS staff paper
46
Sequence of Field Operations
• Based on surveys of farmers
• What they do, how they do it and when it is done
• Tillage, planting, cultivation, pesticide
applications and harvesting
• Quantity of inputs applied, when and how
applied
• Seed, fertilizer, herbicides, insecticides,
fungicides, irrigation water
47
Understanding Operating Costs
• Fertilizer – typically pounds of element, not
product
•
•
•
•
N, P2O5, K2O, Zn, micros
Dry nitrogen – priced as urea (46-0-0)
Liquid nitrogen – priced as solution 32 (32-0-0)
Dry phosphorous – price from 11-52-0 with nitrogen valued at
price of urea
• Liquid phosphorous – price from 10-34-0 with nitrogen valued
at price of solution 32
• Potash – valued at price of 0-0-60 (muriate not sulfate)
48
Understanding Operating Costs
• Pesticides (chemicals)
• Herbicides, insecticides, fungicides, fumigants
• Detailed list of products, quantity & price
• Trade name, not common name
• Custom & consultants
• Input application: fertilizer & some chemicals
• Hand labor: onions
• Consultant: potatoes, onions, sugarbeets
49
Understanding Operating Costs
• Irrigation
• Water assessment (irrigation district, canal co.)
• Irrigation system repairs:
• Center pivot - cost per acre-inch
• Concrete ditch & siphon tube – cost per acre
• Irrigation power - costs to pressurize only
• Cost per acre-inch
• Machinery
• Fuel – gallons per acre
• Lubricants – cost per acre
• Repairs – cost per acre
50
Machinery Cost Calculations
• Based on engineering and economic equations
built into the crop budget generator program
• Calculates machinery operating expenses
• Fuel, oil, lubricants, and repairs
• Machine time: hours per acre
• 8.25 ÷ (speed x width x field efficiency)
• Labor hours based on machine time x 1.2
• Calculates machinery ownership costs
• Depreciation, interest and insurance (taxes if
applicable)
51
Understanding Operating Costs
• Labor hours per acre
• Machinery: tractor operators and truck drivers
• Irrigation: specific to irrigation system
• Other: unskilled labor used primarily at harvest
• Storage
• Potatoes & onions
• Other
• Crop insurance
• Assessments
52
Understanding Operating Costs
• Operating interest
• Charged from month of application to harvest month
• Total operating costs per acre
• Total operating costs per unit of production
based on yield used to generate gross receipts
53
Understanding Ownership Costs
• Tractors & Equipment Depreciation, Interest and
Insurance
• Calculated only on equipment used
• Capital recovery method of D & I over the useful life,
not the tax life
• Based on 75% replacement cost new, adjusted using
NASS machinery index
54
Understanding Ownership Costs
• Land
• 1-year crop-specific cash lease, or cash equivalent
based on crop share (northern Idaho)
• Includes irrigation system ownership costs
• Overhead
• 2.5% of cash expenses
• Management
• 5% of gross receipts
55
Cost of Production
• Uses of enterprise budgets:
Financing
Lease negotiations
Enterprise selection
Cost control and analysis
Marketing plans
Appraisals – income approach
Analyzing alternatives
Potato Costs and Returns Estimates
• Seven potato CAR estimates statewide
• SWI-Fumigated: 1,600 acre farm, 500 acres potatoes
• SCI Fumigated & Non-Fumigated:
• 2,200 acre farm, 550 acres potatoes
• Eastern Idaho:
• Southern Fumigated & Non-Fumigated:
• 2,400 acre farm, 800 acres potatoes
• Northern: 2,400 acre farm, 800 acres potatoes
• Seed: 2,000 acre farm, 500 acres seed potatoes
57
Potato Costs and Returns Estimates
• Base budget: Cost to grow, harvest & sort
• Detailed cost per acre with summary by major cost
category
• Cost per cwt for operating, ownership and total cost
based on field-run yield
• Storage: starts with base cost per cwt for both fieldrun and paid yield,
• Adds cost per cwt storage ownership & repairs
for both field-run and paid-yield
• Adds monthly storage operating costs
58
2013Production Costs, Storage Ownership & Repair Costs, &
Monthly Storage Operating Costs
SWI
Field-Run
SWI
Paid-Yield
SCI
Field-Run
SCI
Paid-Yield
EI-S
Field-Run
EI-S
Paid-Yield
Base COP:
$7.11
$7.49
$7.05
$7.42
$6.83
$7.19
+ Storage Owner.
$7.62
$8.02
$7.56
$7.93
$7.34
$7.73
+ Storage Repairs
$7.66
$8.06
$7.60
$8.00
$7.38
$7.77
Oct
$7.86
$8.28
$7.81
$8.22
$7.58
$7.98
Nov*
$8.03
$8.45
$7.98
$8.40
$7.75
$8.16
Dec
$8.12
$8.54
$8.07
$8.49
$7.84
$8.25
Jan
$8.20
$8.63
$8.15
$8.58
$7.92
$8.34
Feb
$8.28
$8.72
$8.24
$8.67
$8.00
$8.42
Mar
$8.37
$8.81
$8.33
$8.76
$8.09
$8.51
Apr*
$8.55
$9.00
$8.51
$8.96
$8.27
$8.71
May
$8.66
$9.11
$8.62
$9.07
$8.38
$8.82
Jun
$8.78
$9.24
$8.74
$9.20
$8.50
$8.94
Paid-Yield = 95% of Field-Run Yield
*Sprout inhibitor applied
Storage Operating Costs: labor, power, chemicals, interest, shrink and insurance
SWI = Southwestern Idaho, SCI = Southcentral Idaho, EI = Eastern Idaho
Summary
• If cost of production doesn’t matter to the market,
should it matter to you?
• Are you losing money if you don’t cover your cost of
production?
• Perhaps not. You may not, however, be getting a
market rate of return on you labor, your management,
and your equity.
• How do you survive in a competitive commodity
market?
67
Summary
• Become the low cost producer – forever.
• Focus on producing the highest quality crop for the
lowest cost per cwt
• Manage your production costs
• You can only manage what you measure
• It’s not how many potatoes your produce per acre, it’s
ultimately how many dollars you produce per acre!
68
Market-based economies: supply & demand set price
Supply
$
P1
Demand
Quantity
Q1
69
Questions?
Comments
Internet Site
• University of Idaho – AERS Idaho Ag Biz
http://web.cals.uidaho.edu/idahoagbiz/
Select Publications for potato reports
-Includes annual cost of production comparison
Select Enterprise Budgets for crop and livestock costs
and returns estimates
- Specify one or more: Year, Region, Crop, Format