Agricultural Price Policies, Policy Goals and Methods of Estimating Costs of Production

Raising agricultural price policies on costs of production is commonly applied. although with reservations by agricultural economists. Agricultural economists' concerns are centered on the problems with assigning values to the contributions of durable inputs and to the value of those inputs supplied by the farm operator and the operators' household. Some of these expressed reservations of agricultural economists can be reduced if focus is placed on the policy goal to be achieved in developing the production cost estimate. The policy goal affects the selection of the population on which the cost estimates are made and the items of cost to be included in the cost estimate. Policies designed to provide incentives to producers must be targeted toward the costs of those producers supplying the major portions of output for the commodities in questions. Thus, the costs of an often relatively small number of large producers become heavily weighted. However, policies to sustain the income of selected groups of farmers must be based on the costs of production experienced by a large number of small farmers. Costs estimates should distinguish between financial costs and economic costs. Structural differences occur in the cost structure among farmers. In setting prices, major attention should be given to the annual and capital replacement financial costs. Price policies cannot be directed to meet a specifically targeted economic cost.