Tobacco: Costs of producing and selling flue-cured tobacco: 1989, 1990, and preliminary 1991

Costs of producing and selling flue-cured tobacco: 1989, 1990, and preliminary 1991 – U.S. Dept. of Agriculture, Economic Research Service report

Annette L. Clauson

Abstract: The variable cost of producing and selling flue-cured tobacco increased from

$1,833 per acre in 1990 to $1,938 in 1991. Total costs per acre, excluding land and quota

costs, are expected to increase about 5 percent, to $2,563 per acre. Most variable costs

probably increased on a per acre basis in 1991. The variable cost of producing flue-cured

tobacco per 100 pounds increased to about $88 in 1991. Per 100 pounds, the total cost of

producing flue-cured tobacco, excluding a charge for land and quota, averaged $113 in

1989, $108 in 1990, and is expected to average $116 in 1991.

Keywords: Flue-cured tobacco, variable costs, total costs, cost of production.

Cost Changes, 1989 to 1990

Variable costs per acre increased about 6 percent between 1989 and 1990 (table A-1). Increases in most input prices, especially fuels, contributed to higher variable costs per acre in 1990. Labor, the single largest cost item, increased from $647 to $681 per acre. With yields a little higher in 1990, variable costs per 100 pounds decreased from $84 to $81.

Machinery and barn ownership costs increased 2 percent due to higher machinery and barn prices. Total costs, excluding land and quota, increased about 5 percent on a per acre basis to $2,443. Per 100 pounds, total costs, excluding land and quota, decreased from $113 in 1989 to $108 in 1990, due to higher yields in 1990.

Cost Changes, 1990 to 1991

Per acre variable costs are expected to increase from $1,833 in 1990 to $1,938 in 1991 (table A-1). Variable costs per 100 pounds also are expected to increase, because yields are about 2 percent lower in 1991. All variable costs, except interest, increased on a per acre basis. Chemical costs increased about 7 percent in 1991 while fertilizers showed a modest increase of 2 percent.

The Federal minimum wage rate increased from $3.80 to $4.25 an hour in April 1991, raising 1991 labor costs to about $729 per acre. The effective quota fell in 1991, which helped ease the demand for workers from an already declining supply of people available to harvest tobacco. To partially offset wage increases, farmers continued to use labor-saving bulk barns and increased adoption of mechanical harvesters, thereby lowering labor requirements.

Machinery and barn ownership costs have increased slightly in 1991 due to a slight increase in machinery and barn prices. Total costs per acre, excluding land and quota, are expected to be about $2,563 in 1991, slightly higher than in 1990. Total costs per 100 pounds, excluding land and quota, are also expected to increase slightly to about $116. Even with higher auction prices in 1991 over 1990, production costs increased on a per pound basis because of expected lower yields.

To calculate the cost-index component for the 1992 price support level for flue-cured tobacco under the Reconciliation Act, assessments, overhead including management, land, and quota costs are excluded. With these exclusions, 1991 costs per acre are expected to increase about 4 percent from 1990.

Procedures for Estimating Costs

Variable costs are out-of-pocket cash expenses, except for unpaid labor costs, incurred in production and vary according to the quantities and prices of inputs used. ERS methodology assumes that per acre input quantities, except for those determined by yield, remain constant between survey years. Input prices can vary greatly from the survey base year, and are therefore updated annually. The base year input quantities are then multiplied by each year’s updated prices to estimate that year’s costs. In some cases, survey respondents were asked directly about costs for items such as plant bed materials, fertilizer and lime, chemicals, custom work, noncash benefits to workers, and curing fuel and electricity. These items are updated in nonsurvey years with price indexes.

Other variable cost items such as wage rates, marketing, and inspection and grading fees were obtained from other sources. Finally, the quantities and costs from the survey farms were weighted to reflect the acreage represented by individual farms and aggregated to the national level.

The average market prices for the 1989 and 1990 flue-cured tobacco crops were $1.674 and $1.673 a pound. Since the 1991 flue-cured markets are still open, the average price for the 1991 crop is not known. Based on current market prices as of September 1, a price of $1.73 was estimated for the 1991 crop. The yields for 1989 and 1990 were based on actual yields averaging 2,069 and 2,253 pounds per acre, respectively. Yields for 1991 were those indicated by NASS as of September 1, averaging 2,206 pounds.

Data Sources

The major source of data for cost estimates in this article is the 1987 Farm Costs and Returns Survey (FCRS). This nationwide survey of farm costs, returns, and production practices is conducted each spring by the Economic Research Service (ERS) and the National Agricultural Statistics Service (NASS). Production costs for each of the major crop and livestock enterprises are based on surveys conducted at about 4-year intervals. Data obtained from 249 tobacco producers in the flue-cured belt for the 1987 crop year are updated to obtain 1989, 1990, and preliminary 1991 estimates.

Eighteen different harvest systems were budgeted, reflecting cost differences by region and type of system used. The relative importance of each system, measured by the weighted acres harvested, reflects the differences in labor, barns, and harvest machinery used. In the 1987 survey, tobacco growers were asked for information on land use and rental arrangements; expenditures for items such as plant bed materials, chemicals, fertilizer, curing fuels and electricity, and custom operations; field operations and practices; tractor use, including size, age and acreage covered; family and hired labor hours; the number, capacity, type, and age of curing barns; and use of irrigation systems.

Some of the costs are calculated by a computer model called the ERS Budget Generator. The model uses input information such as field operations and machines, barns, and irrigation systems to calculate some of the costs, including fuel and lubrication, repairs, capital replacement, and taxes and insurance.

Other NASS data sources, including Agricultural Prices, Crop Production, and Farm Labor, were used for fertilizer and chemical prices, tobacco yields, wage rates, and miscellaneous expenses. These data, along with the survey information, were used to establish a 1987 national cost base and costs. Expenses for flue-cured tobacco production are given on a per acre and per 100 pound basis. [Table A-1 omitted]

COPYRIGHT 1991 For more information, contact US Department of Agriculture Economic Research Service. Phone: 1-800-999-6779 (8:30-5:00 ET).

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