Utilizing expectations to measure economic depreciation and capital gains of farm machinery

Rather than relying on ex post market data, this study derives theoretically more appropriate measures of economic depreciation and capital gains based on the expectations of farmers. In this context, values of depreciable assets are highly sensitive to the pattern of expected future earnings and unexpected windfall gains. Experimental survey data obtained from a panel of Illinois cash grain farmers demonstrate the magnitude by which conventional accounting methods overstate economic depreciation and underestimate real capital gains. These biases make it difficult to appraise the financial well‐being of the agricultural sector.