Opportunity Cost

Opportunity cost is the benefit sacrificed when a scarce resource is used for one purpose rather than its best alternative use. It is the value of the next-best feasible alternative forgone, including relevant monetary and non-monetary benefits. It applies to choices involving land, labour, feed, capital and agricultural output.

Feed grains and ethanol production

When feed grain is diverted to ethanol production, its opportunity cost is the net benefit forgone from its best alternative use, ordinarily as livestock or poultry feed. The ethanol produced is the benefit of the chosen use, while the displaced feed value is the cost against which that benefit should be compared.

• Diversion may reduce feed availability, raise the demand for substitute feed or increase animal-rearing costs; the actual effect depends on available substitutes and market conditions.
• Ethanol production can yield distillers dried grains with solubles, which may be used as animal feed. This co-product reduces, but does not necessarily eliminate, the net feed sacrificed.
• If grain has alternative food or industrial uses, the relevant opportunity cost is whichever feasible alternative would have generated the highest net benefit.

Application within an animal-rearing enterprise

Opportunity cost is measured by the net benefit forgone, not merely by expenditure on the selected activity.

• Using land to grow fodder sacrifices the net return from the best alternative crop that could have been cultivated.
• Family labour used in dairy work carries the wage or income forgone from its best alternative employment.
• Capital used to purchase a milch animal sacrifices the return from the best alternative investment.
• Feeding milk to calves instead of selling it involves the sale value forgone, adjusted for the expected benefit from improved calf development.

Decision-making and economic cost

A rational choice compares the expected additional benefit from an activity with the opportunity cost of the required resources. This helps determine the enterprise mix, feed use, herd size, labour allocation and capital investment.

• A resource with no valuable alternative use may have a low or zero opportunity cost despite remaining physically useful.
• Unlike accounting cost, economic cost includes implicit costs of unpaid family labour, owned land and the farmer's own capital; economic profit may therefore be lower than accounting profit.