October 25, 2010

Basics to Farm Costs

Arabinda Mitra

At the ripen age of seventy my old grand-father understood the importance of farm-cost considerations in farming and consciously sold the bullock-pair he had. Being baptized on farm-cost concept he uttered “it is useless to have one bullock-pair and maintain them with feed & care for a small holding that I have”. Truly, a cost-conscious person would hold that a very small farmer would benefit much from hiring bullock power in lieu of keeping bullocks. Thus, cost-awareness or cost estimates educate ours in employing the types of resources in farming. In my grand-father’s case he tried to minimize costs by hired plows for harvesting more profit. The above case may be extended to other fields. Introducing new technology, new techniques, substitution of scarce resources or crop-planning require comparative cost-return statements for effective implementation. Partial budgeting is a common tool for examining marginal changes in returns or benefits relative to small changes in costs (marginal costs).

To my students I usually refer to that if you teach a parrot “costs” and “returns”-it will learn the whole art of farm-business. Now, the question comes of defining farm-costs. Farm-cost represents sacrifice. Sacrifice involves paid cash-expenses in arranging inputs-such hiring labors, purchasing fertilizer, chemicals etc. or unpaid efforts of giving own or family labor or using own resources ,for example own seed or own organic manures. The former type is easily sensitized as pocket-money goes for inputs. We call them explicit costs. The latter group does not involve money-transaction but involves sacrifice and that needs to be accounted for estimating costs. Those unpaid components are implicit costs. Implicit costs are latent or hidden costs. In estimating costs we impute the value of un-paid costs i.e.; implicit costs.

To impute the real value of un-paid sacrifice we use the concept of opportunity costs. Opportunity cost concept is based on the philosophy of considering the extent of opportunity one has to forgo for doing or employing something. For example, if a farmer cultivates jute in pre-kharif season then he sacrifices the opportunity of getting paddy production. The loss of paddy produce is the opportunity cost of jute production. Loss is another name of costs. Using the concept of opportunity costs we evaluate the value of farm-operator’s own labor sacrificed in production. In this case the best opportunity of own labor is the earning what is lost while farming. Similarly, opportunity cost of home-supplied manure is the market value of manure what is foregone. Likewise, opportunity cost of land is calculated on the basis of foregone share what he could earn if leases his land. In the same way opportunity cost of fixed capital is the loss of fixed-interest of the fixed capital.

Summing explicit costs, implicit costs and opportunity cost of production we arrive to real-costs. For easy memorizing dissect the word “cost” and remember “c” for covered (hidden) costs-unpaid costs; “t” for transparent costs –explicit costs; “o” for opportunity costs and “s” for summation.

With above cost-concepts, farm-costs are classified into four major classes. Cost-A1, Cost-A2, Cost-B, and Cost-C. Cost –A1 emphasizes mainly pocket costs of a farmer. It is the most relevant cost to a farmer. Cost-A2 is the pocket costs of a lease-hold farmer or share cropper. Cost A1 plus rent given to the land-lord is Cost A2. Cost-B includes Cost a1or a2 plus opportunity cost of land and opportunity cost of fixed capital. Cost c is Cost B plus opportunity cost of family labor. It is the comprehensive Cost.The components of Cost A1 are:

a. Hired human labor,
b. Owned and hired bullock labor,
c. Seeds (owned+purchased)
d. Manures and fertilizers
e. Implement charges,
f. Land revenue and other taxes,
g. Irrigation charges,
h. Depreciation of implements &farm machinery
i. Interest on working capital
j. Other miscellaneous charges
Depreciation is the loss in the value of an asset for use. There are many standardized methods of calculating depreciation.

In recent years, cultivators are becoming more and more conscious about the costs and returns from agriculture in general and enterprises on farm in particular. Cultivator relates the price, which he receives for the produce in the market with his cost of production. Government takes into account the cost of production in deciding the price policy and for declaring the minimum support prices for selected important crops. The commission which recommends the minimum support prices to government is aptly named as the ‘Agricultural’ Costs and Prices Commission.
In view of the rapid spread of technology in agriculture, farmers are required to face a severe competition, particularly when the farm produce is to be exported. One of the ways to survive in the competition as also to gain better profit is to have a lower cost of production. For this farm costing or working out the cost of production of crops/enterprises, is necessary. The farm costing is also useful to the formers to keep watch on the expenditure which is increasing in the modern farming.
In fine, I would like to give one real example how farmers in Ghoragacha village in Nadia district benefited from learning the basics of Cost awareness. It was about ten years back we were organizing Farmer’s School in situ in that village. Villagers there were growing traditional vegetables and we suggested them to shift to high cash value crops like Guava. In the beginning they were hesitant to adopt the technology. We brought some of them to Baruipur a famous area of Guava production. We asked the Ghoragacha sample farmers to estimate costs-returns of Guava and compare with their present cultivars. They were convinced with the high returns from Guava. Finally, they began guava cultivation at Ghoragacha. Now the entire surroundings have become Guava producing zone. Villagers have changed their crop-practices as well as life style.
My humble submission is that farmers should be acquainted with farm-record keeping and cost-return analysis. NGOs as well as SHGs may take the initiative at grass root levels. A little knowledge in farm accounting will make their extension promotional efforts easier.