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Economic Depreciation Change: Evidence From Periods of Net Farm Income Change

Barry Ward and Dan Shinkle

Summary

Deterioration in profit margins for major Midwestern field crops over the last three years has created a changing environment with respect to farm machinery and equipment investment. The strong returns for Midwestern field crops from 2006 to 2012 together with favorable tax incentives (bonus depreciation and Section 179 expensing) led to strong demand for new and used farm machinery and equipment over this period. The subsequent period (2013 to present) of lower crop prices and profit margins has led to relatively weaker demand for farm machinery and equipment over this period. This weaker demand has led to softer markets for used equipment and trade-ins. These lower prices for farm machinery and equipment trade-ins has created a higher rate of implied economic depreciation for this machinery and equipment compared to the previous high profit period.
An analysis of farm machinery and equipment sales data from the online used farm equipment sales platform, Machinery Pete, allows us to examine the change in resale prices of used farm equipment over the period of profit margin change from 2000 through 2015. Change in resale price per unit and price per-hour-of-use of select makes/models over this time series implies a change in economic depreciation. Farm machinery and equipment were found to have a lower resale value per unit and per-hour-of-use and therefore higher implied economic depreciation in the period of lower profit margins from 2013 through 2015.

Details

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