| Machinery and equipment represent an important factor of agricultural production that accounts for a substantial share of production costs. One of the largest components of machinery and equipment costs is depreciation. Actual economic depreciation costs are known only when an asset is disposed of at the end of its useful life, but estimated depreciation costs are needed prior to this to facilitate enterprise budgeting, machinery replacement decisions, policy analysis, and many other economic analyses.; Most previous depreciation studies have estimated depreciation using simple linear or geometric models, resulting in inaccurate depreciation estimates. Prior studies often relied on data that had a particular depreciation pattern embedded within the data calculations. This study contributes to the body of knowledge on depreciation in three ways. First, a relatively new source of data is used which better reflects true market value of agricultural machinery and equipment. Secondly, depreciation patterns are explained using a hedonic pricing approach, which relates the value of machinery and equipment to the value of their attributes, including age, hours of use, and condition. Finally, a flexible functional form is used to estimate depreciation patterns using Box-Cox power transformations on both dependent and independent variables. A flexible form allows the data to determine the most appropriate depreciation pattern.; Depreciation functions were estimated for four sizes of tractors, combines, swathers, balers, planters, disks, and plows. In most cases, the estimated transformation values indicate that linear depreciation is inappropriate in explaining machinery values for this data set over time, although several functions included segments of depreciation which were close to linear. Cobb-Douglas and sum of year digits were the most common functional forms estimated.; The hedonic pricing approach enhanced the explanatory power of each depreciation function estimated. Age, condition, manufacturer, and net farm income were significant for almost all machinery and equipment. Other attributes, such as size, hours of annual use, drive type, and the inclusion of a front-end loader were significant in estimating depreciation of tractors, combines, swathers, and balers. Tillage and planting equipment values were also influenced by size, hydraulics, and region. |
