Skip to content
Licensed Unlicensed Requires Authentication Published by De Gruyter July 2, 2014

Measuring Sunk Costs in Agricultural and Food Industry Assets: Why Some Assets Sell Below Appraisal

  • Michael A. Boland , John M. Crespi EMAIL logo and Tracy M. Turner

Abstract

Asset obsolescence or external obsolescence isa decline in the economic value of capital because ofa decrease in demand for the capital’s services. Measurements of sunk costs typically use appraised values of capital. In food and agricultural industries facing asset obsolescence due to government policy, appraised values may be greatly overstated and this has implications for research on industrial structure. A theoretical model to account for the appraisal error is developed and the method is applied to the U.S. sugar beet industry. The sugar beet industry displays symptoms of asset obsolescence. Our estimates indicate that plant appraisals using currently accepted practices greatly overstated the true value of these assets in 2006.

JEL: L66; L88; Q18

References

Barnard, C. H., G.Whittaker, D.Westenbarger, and M.Ahearn. 1997. “Evidence of Capitalization of Direct Government Payments into U.S. Cropland Values.” American Journal of Agricultural Economics79:164250.10.2307/1244396Search in Google Scholar

Beet Sugar Development Foundation. 1982. Beet-Sugar Technology, 3rd ed. Fort Collins, CO: Studio of Printcraft.Search in Google Scholar

Boland, M.2003. “Wyoming Sugar Company LLC.” Arthur Capper Cooperative Center Case Study Series 03-02. Presented at Sixth Annual Farmer Cooperatives Conference, Kansas City, MO, October 30–31.Search in Google Scholar

Brooks, J. C., A. C.Cameron, and C. A.Carter. 1998. “Political Action Committee Contributions and U.S. Congressional Voting on Sugar Legislation.” American Journal of Agricultural Economics80(3):44154.10.2307/1244547Search in Google Scholar

Burt, O. R.1972. “A Unified Theory of Depreciation.” Journal of Accounting Research10(1):2857.10.2307/2490217Search in Google Scholar

Fare, R., S.Grosskopf, and C. A. K.Lovell. 1985. The Measurement of Efficiency of Production. Boston, MA: Kluwer-Nijhoff.10.1007/978-94-015-7721-2Search in Google Scholar

Featherstone, A. M., and T. G.Baker. 1988. “Effects of Reduced Price and Income Supports on Farmland Rent and Value.” North Central Journal of Agricultural Economics10:17789.10.2307/1349218Search in Google Scholar

Fisher, J. D., G. H.Lentz, and J. J.Stern. 1984. “Tax Incentives for Investment in Nonresidential Real Estate.” National Tax Journal6:987.10.1086/NTJ41791934Search in Google Scholar

Fisher, F. M., and J. J.McGowan. 1983. “On the Misuse of Accounting Rates of Return to Infer Monopoly Profits.” American Economic Review73:8297.Search in Google Scholar

Hilber, C. A. L., and C.Mayer. 2009. “Why Do Households Without Children Support Local Public Schools? Linking House Price Capitalization to School Spending.” Journal of Urban Economics65:7490.10.1016/j.jue.2008.09.001Search in Google Scholar

Hilber, C. A. L., and T.Turner. “The Mortgage Interest Deduction and Its Impact on Homeownership Decisions.” The Review of Economics and Statistics. Posted Online November 12, 2013. doi:10.1162/REST_a_00427.10.1162/REST_a_00427Search in Google Scholar

Hotelling, H.1925. “A General Mathematical Theory of Depreciation.” Journal of American Statistical Association20:34053.10.1080/01621459.1925.10503499Search in Google Scholar

Ibbotson SBBI. 2008. 2008 Classic Yearbook: Market Results for Stocks, Bonds, Bills, and Inflation, 1926–2007. Chicago, IL: Morningstar, Inc.Search in Google Scholar

Jackson, T. O.2001. “The Effects of Environmental Contamination on Real Estate: A Literature Review.” Journal of Real Estate Literature9:93116.10.1080/10835547.2001.12090100Search in Google Scholar

Kirwan, B. E.2009. “The Incidence of U.S. Agricultural Subsidies on Farmland Rental Rates.” Journal of Political Economy117:13864.Search in Google Scholar

Kolbe, A. L., and L. S.Borucki. 1998. “The Impact of Stranded-Cost Risk on Required Rates of Return for Electric Utilities: Theory and an Example.” Journal of Regulatory Economics13:25575.10.1023/A:1008081104532Search in Google Scholar

Moschini, G., and D.Hennessy. 2001. “Uncertainty, Risk Aversion, and Risk Management for Agricultural Producers.” In Handbook of Agricultural Economics. Volume 1a. Agricultural Production, edited by B. L.Gardner and G. C.Rausser, 87153. North-Holland, Amsterdam: Elsevier Science.10.1016/S1574-0072(01)10005-8Search in Google Scholar

Moss, C. B., and A.Schmitz. 2002. “Vertical Integration and Trade Policy: The Case of Sugar.” Agribusiness: An International Journal18:4960.10.1002/agr.10006Search in Google Scholar

National Agricultural and Statistics Service, US Department of Agriculture. 2011. Accessed November. http://www.nass.usda.gov/Data_and_Statistics/Quick_Stats/.Search in Google Scholar

Netzell, O.2009. “A Study of Micro-Level Variation in Appraisal-Based Capitalization Rates.” Journal of Property Research26:23563.10.1080/09599911003669682Search in Google Scholar

Nourse, H. O.1987. “The ‘Cap Rate,’ 1966-1984: A Test of the Impact of Income Tax Changes on Income Property.” Land Economics63:14752.10.2307/3146576Search in Google Scholar

Oates, W. E.1969. “The Effect of Property Taxes and Local Public Spending on Property Values: An Empirical Study of Tax Capitalization and the Tiebout Hypothesis.” Journal of Political Economy77:95771.10.1086/259584Search in Google Scholar

Perrin, R. K.1972. “Asset Replacement Principles.” American Journal of Agricultural Economics54(1):6067.10.2307/1237734Search in Google Scholar

Petrolia, D. R., and P. L.Kennedy. 2003. “Increasing the U.S. Tariff-Rate Sugar Quota for Cuba and Mexico: A Partial-Equilibrium Simulation.” Journal of Agricultural and Applied Economics35 (3):58997.10.1017/S1074070800028303Search in Google Scholar

Risch, C. C., M. A.Boland, and J. M.Crespi. 2014. “Survival of U.S. Sugar Beet Plants from 1897 to 2011.” Agribusiness30:113.Search in Google Scholar

Schulz, L. L., and J. M.Crespi. 2012. “Presence of Check-Off Programs and Industry Concentration in the Food Manufacturing Sector.” Agribusiness28:14856.10.1002/agr.21287Search in Google Scholar

Southern Minnesota Beet Sugar Coop, Relator, vs. County of Renville, Respondent. 2007. A07-394, Supreme Court, August 23.Search in Google Scholar

Stevenson, S., J.Young, and C.Gurdgiev. 2010. “A Comparison of the Appraisal Process for Auction and Private Treaty Residential Sales.” Journal of Housing Economics19:15766.Search in Google Scholar

Sutton, J.1996. Sunk Costs and Market Structure. Cambridge, MA: MIT Press.Search in Google Scholar

Taylor, M., and G.Brester. 2005. “Non-Cash Income Transfer and Land Values.” Review of Agricultural Economics27:52641.10.1111/j.1467-9353.2005.00262.xSearch in Google Scholar

Troxel, C. E.1936. “Economic Influences of Obsolescence.” American Economic Review26:28090.Search in Google Scholar

Tyrvainen, L., and A.Miettinen. 2000. “Property Prices and Urban Forest Amenities.” Journal of Environmental Economics and. Management39:20523.10.1006/jeem.1999.1097Search in Google Scholar

U.S. Department of Agriculture, Economic Research Service. various years. Sugar and Sweeteners Report. Washington, DC.Search in Google Scholar

U.S. Department of Commerce, 1996 to 2007. “Annual Census of Manufacturers.”Search in Google Scholar

U.S. Environmental Protection Agency (EPA). November 2011. “Potential Stranded Capital Analysis on EPA Light-Duty Technology Cost Analysis.” EPA-420-R-11-019. Washington, DC.Search in Google Scholar

U.S. General Accounting Office. 2002. “Supporting Sugar Prices Has Increased Users’ Costs While Benefiting Producers.” Report to Congressional Requesters, GAO/RCED-00-126.Search in Google Scholar

U.S. Securities and Exchange Commission, 1996–2007. “10-K Reports, Assorted Firms.”Search in Google Scholar

Wilen, J. E.2009. “Stranded Capital in Fisheries: The Pacific Coast Groundfish/Whiting Case.” Marine Resource Economics24:118.10.1086/mre.24.1.42629642Search in Google Scholar

Published Online: 2014-7-2
Published in Print: 2014-1-1

©2014 by De Gruyter

Downloaded on 3.10.2023 from https://www.degruyter.com/document/doi/10.1515/jafio-2014-0009/html
Scroll to top button