“Agri-businesses utilize depreciable assets, and they acquire new capital assets or replace old ones as their business expands and evolves,” says Azam Nikzad, market analyst/coordinating researcher with the Alberta government. Canada Revenue Agency defines depreciation as the gradual decline in the value of an asset over time and the method used to allocate the cost of tangible assets throughout their operational lifespan.
Higher depreciation costs imply increased costs for buildings, machinery and equipment, but it also suggests increased investment in these assets. Alberta’s agricultural sector has experienced a continued upward trend in total depreciation expenses, demonstrated by an average annual increase of 5.6% over the past decade. Notably, depreciation on machinery represented 83% of the total depreciation charges in 2022, whereas depreciation on buildings accounted for the remaining 17%.
Many factors contributed to the surge in depreciation costs in the agricultural sector. One factor is the composition of capital shifting towards equipment, machinery and software. This shift implies a correlation between the evolving capital composition and the observed trend in depreciation rates.
“Modernization of agricultural practices coupled with demand for more efficient farming has driven farmers to invest in technologically advanced equipment,” explains Nikzad. “New equipment comes at higher cost, contributing to the upward trend in depreciation charges. Furthermore, inflationary pressures on material and labour costs contribute to increased construction expenses, which increases asset values and leads to higher depreciation on new buildings.”