ABSTRACT
This chapter discusses alternative methods of quantifying opportunity interest costs associated with ownership of nonland farm assets. It focuses on methods adopted by US Department of Agriculture (USDA), primarily because of excellent documentation and because the agency has experimented with both nominal and real rates of interest in an attempt to accurately portrays the cost structure of US agriculture. The Agriculture and Food Act of 1981 provided USDA greater flexibility in estimating production costs. Firms maximizing equity returns should base their rate on the firm's marginal cost of equity capital. Use of an opportunity cost rate assumes the budgeting objective is to compare agricultural returns with rates available in other sectors in the economy. Record-keeping associations rarely include capital gain/loss statistics due to data limitations and infrequent sales of agricultural assets. Farm management record-keeping associations typically choose a discount rate based on perceived residual income returns to agricultural assets.
