by: Barry Ward, Leader Production Business Management
Ohio State University Extension
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 2013 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.
Findings:
- The average depreciation for 8 tractor models over the 2002-2015 period averaged $24.26 per tractor hour.
- The average depreciation for 8 tractor models over the 2002-2006 period averaged $31.68 per tractor hour.
- The average depreciation for 8 tractor models over the 2007-2013 period averaged $19.46 per tractor hour.
- The average depreciation for 8 tractor models over the 2014-2015 period averaged $22.50 per tractor hour.
- Evidence of fluctuations in economic depreciation between periods of high and low profitability seems to be supported by the data.
Conclusions:
- Calculating depreciation per machine hour for power equipment may be more accurate than traditional methods of calculating depreciation.
- Fluctuations in general farm profitability and machinery and equipment demand should be considered when utilizing hourly depreciation measures.
- Follow equipment resale markets to discern changes in economic depreciation.
- 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 between periods of high profit margins and periods of low to negative profit margins.
- The tractors examined in this study 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 2014 through 2015 compared to the period of higher profit margins from 2007 through 2013.