The Purdue-CME Group Ag Economy Barometer After One Year
By Jim Mintert, David Widmar and Michael Langemeier
The Purdue/CME Group Ag Economy Barometer launched publically in May 2016 with the release of survey results from an April 2016 survey of 400 U.S. agricultural producers. The barometer’s public launch came following six months of data collection used to establish a base period for the barometer and its two sub-indices, the Index of Current Conditions and the Index of Future Expectations. On the one-year anniversary of the Barometer’s public launch, we reflect back on some things we’ve learned since the beginning of data collection in October 2015.
Commodity prices are important
At the onset of this project, some observers suggested that a monthly barometer focused on the agricultural economy would simply be a function of key commodity prices and, as a result, would not provide any new information. It is true that key commodity prices, especially corn and soybean prices, are important drivers of producer sentiment. For example, the Ag Economy Barometer and USDA’s monthly average farm-level corn price trended the same direction about half of the time. However, reviewing the barometer over the last year and a half has made it clear that there are other important drivers of farmer sentiment beyond commodity prices.
But sentiment is much more than just commodity price
After 18 months of data collection and analysis, it’s clear that producer sentiment regarding the U.S. agricultural economy is driven by more than just day-to-day changes in commodity prices. For example, corn and soybean prices peaked in mid-June 2016, partly based on concerns that adverse weather might reduce U.S. crop yields leading to lower production. But by late June and early July, favorable weather conditions eased concerns about 2016 yields and corn and soybean prices declined significantly. Despite the decline in commodity prices, producer sentiment recorded in July 2016 was 8 percent higher than a month earlier.
Delving more deeply into the data made clear that producer expectations about the future (measured by the Index of Future Expectations) were the driving force behind the improvement in sentiment. Conversely, the Index of Current Conditions moved lower. Follow-up conversations with producers the rest of the summer indicated that the improvement in sentiment about the future was motivated by a couple of factors. First, the spring price rally, albeit short-lived, led to a longer-term change in producer expectations about the future. Specifically, the spring price rally made producers cognizant that prices could rally in response to changing conditions, providing a boost to their long-run perspective on the agricultural economy. Secondly, better weather conditions improved yield prospects on their own farms, providing the potential for a revenue boost in the year ahead despite the price decline.
Sentiment is not the same as profitability
In early February 2017, the Ag Economy Barometer results from the January survey were published the same day that USDA released its initial estimate of U.S. net farm income for 2017. Sentiment in January, as measured by the Ag Economy Barometer, was up sharply compared to the prior month and was the highest sentiment reading since data collection began in October 2015. In contrast, USDA estimated that net farm income would decline in 2017 for the fourth year in a row. The fact that these two seemingly contradictory pieces of information about the U.S. farm economy hit the news on the same day led some observers to question how sentiment could improve when incomes were forecast to decline yet again.
But sentiment is not determined solely by profitability. Merriam-Webster defines sentiment as “…an attitude, thought, or judgment prompted by feeling…” There can be a multitude of factors that influence attitudes, thoughts and feelings. One of the questions posed to producers as part of the January survey was “Do you think the regulations impacting agriculture will be more restrictive, less restrictive, or about the same five years from now?” Despite the fact that regulations impacting agriculture have been increasing for many years, 41 percent of the respondents said they expected a less restrictive regulatory environment in agriculture five years from now. In turn, that perspective (perhaps in addition to other unexplored factors) encouraged producers to have a more optimistic view of the future, despite any concerns they might have about the current year’s income prospects. So, producer sentiment regarding the agricultural economy is motivated by many factors, not just current economic conditions.
External events can make a big difference
Perhaps the most surprising story regarding producer sentiment over the last 18 months was the surge in sentiment following the November 2016 elections. The first producer survey following the election took place just one week after President Trump was elected and Republicans retained control of the House of Representatives and regained a majority of the seats in the U.S. Senate. Sentiment, as measured by the Ag Economy Barometer, jumped by 26 percent compared to a month earlier. This occurred despite the fact that near-term economic conditions in agriculture changed little from October 2016. Producer sentiment continued to improve in December and January before moderating somewhat in February and March.
There are a couple of key points to make regarding the jump in sentiment following the November 2016 elections. First, the increase in optimism was underpinned by a slow but steady increase in the Index of Current Conditions that got underway in August. The improvement in producers’ perception of current economic conditions was motivated in part by a combination of record-large harvests combined with commodity prices that that held up better than many expected following harvest. As a result, 2016 revenues for many crop producers improved somewhat between August 2016 and year-end.
Second, and more importantly, a majority of the uptick was driven by a jump in producers’ forward-looking outlook – measured by the Index of Future Expectations. Although we have not ascertained all the reasons behind the expectation for better economic conditions in the future, it’s clear that producers are expecting a more favorable business climate. We’ve already mentioned producers’ expectations for a more favorable regulatory environment. Other possibilities include expectations for a more favorable tax code and/or changes in estate taxation, which might facilitate succession planning.
The Ag Economy Barometer survey also captured an improvement in agricultural producers’ expectations about the broad U.S. economy. Specifically, when asked about expectations about the U.S. economy in October and again in December, producers indicated they were much more optimistic about the U.S. economy in 2017 and over the next 5 years on the December survey than in October. It’s interesting to note that other sentiment measures of the broader U.S. economy also picked up an increase in optimism following the U.S. election. For example, both the University of Michigan’s Survey of Consumers and the Conference Board’s Consumer Confidence Survey surged following the November 2016 election. All of these surveys point to expectations that the future economic environment will be stronger than expected prior to the election. Whether or not those expectations are met remains to be seen.