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Methods

The methodology used to estimate the national monthly milk cost of production (COP) is based on USDA's annual milk cost-of-production estimates developed from the most recent Agricultural Resource Management Survey (ARMS) of milk producers. The most recent annual estimates are the baseline, and monthly estimates are developed using indexes that reflect differences between the month and the baseline. For example, the monthly milk COP for April 2011 is estimated by indexing the 2010 annual milk COP estimate. The indexes reflect price and milk production differences between annual average conditions in 2010 and April 2011. The annual COP estimates from the most recent milk producer survey, currently 2010, are used as the baseline until a new survey is conducted and processed.  Annual estimates from the next survey then become the baseline for subsequent monthly estimates.

Data used to produce the national monthly milk cost estimates include:

  • USDA's most recent ARMS of dairy operations, currently 2010.  The 2010 ARMS included milk producers in Arizona, California, Colorado, Florida, Georgia, Idaho, Illinois, Indiana, Iowa, Kansas, Kentucky, Maine, Michigan, Minnesota, Montana, New Mexico, New York, Ohio, Pennsylvania, Tennessee, Texas, Vermont, Virginia, Washington, and Wisconsin.
  • Annual and monthly U.S. prices-paid indexes for selected farm inputs, services, supplies and repairs, interest, wage rates, rent, and taxes. These are obtained from the NASS monthly Agricultural Prices report.
  • Annual and monthly milk production per cow, obtained from the NASS monthly Milk Production report.

The variables used in the model are:

  • $ARMS = Weighted-average national milk costs of production developed from the most recent ARMS of milk producers, currently 2010.
  • $NASSINDX = Ratio of annual and monthly U.S. prices paid indexes for selected inputs from the NASS monthly Agricultural Prices report. For example, the index for April 2011 concentrates equals the April 2011 U.S. index for prices paid for concentrates divided by the average 2010 U.S. index for prices paid for concentrates. This index is used to account for monthly price variation in farm inputs.
  • $NASSMILK = Ratio of annual and monthly milk production per cow on a daily average basis from the NASS monthly Milk Production report. For example, the index for April 2011 milk production equals the April 2011 milk production per cow on a daily average basis divided by the average 2010 milk production per cow on a daily average basis.  This index is used to reflect monthly variation in milk production due to seasonal changes. Since the milk production cost estimates are expressed per hundredweight of milk production, this index is used to update the denominator of the ratio. Therefore, (1/$NASSMILK) is used to update the cost items.

Seasonal variation in cow productivity can be a major source of month-to-month changes in production costs. Milk cows produce less during hot summer months despite using about the same level of inputs. This seasonal variation causes costs per unit to increase during the summer even if input prices are unchanged.

Equations for individual components of the model are:

Operating costs:

Feed -

Purchased feed = $ARMSPurchased feed * $NASSINDXConcentrates * (1/$NASSMILK)

Homegrown harvested feed = $ARMSHomegrown harvested feed * $NASSINDXHay and forages * (1/$NASSMILK)

Grazed feed = $ARMSGrazed feed * $NASSINDXHay and forages * (1/$NASSMILK)

Other operating costs:

Veterinary and medicine = $ARMSVeterinary and medicine * $NASSINDXOther farm services * (1/$NASSMILK)

Bedding and litter = $ARMSBedding and litter * $NASSINDXFarm supplies * (1/$NASSMILK)

Marketing = $ARMSMarketing * $NASSINDXOther farm services

Custom services = $ARMSCustom services * $NASSINDXCustom rates * (1/$NASSMILK)

Fuel, lube, and electricity = $ARMSFuel, lube, and electricity * $NASSINDXFuels * (1/$NASSMILK)

Repairs = $ARMSRepairs * $NASSINDXFarm repairs * (1/$NASSMILK)

Other operating costs = $ARMSOther operating costs * $NASSINDXOther farm services * (1/$NASSMILK)

Interest on operating capital = $ARMSInterest on operating capital * $NASSINDXInterest * (1/$NASSMILK)

Allocated overhead:

Hired labor = $ARMSHired labor * $NASSINDXWage rates * (1/$NASSMILK)

Opportunity cost of unpaid labor = $ARMSOpportunity cost of unpaid labor * $NASSINDXWage rates * (1/$NASSMILK)

Capital recovery of machinery and equipment = $ARMSCapital recovery of machinery and equipment * $NASSINDXFarm machinery * (1/$NASSMILK)

Opportunity cost of land (rental rate) = $ARMSOpportunity cost of land (rental rate) * $NASSINDXRent* (1/$NASSMILK)

Taxes and insurance = $ARMSTaxes and insurance * $NASSINDXTaxes * (1/$NASSMILK)

General farm overhead = $ARMSGeneral farm overhead * $NASSINDXProduction items * (1/$NASSMILK)

Note to Users

Users of the monthly milk COP estimates need to be aware that these estimates are not as reliable as the annual estimates 16x16 - Excel published by ERS. ERS measures COP using the annual costs reported by farmers in the ARMS. Annual updates of the ARMS data are based on much more rigorous procedures than the monthly estimation process, as more detailed data are available for the annual update process. The monthly estimates are simply an attempt to reflect how price and production variations in each month cause costs to vary. Also, the monthly cost estimates become less reliable the longer the time interval between the update month and the year in which the last ARMS was conducted.

Last updated: Thursday, July 05, 2012

For more information contact: William McBride