May 3, 2022
Producer Sentiment Improves With Strengthened Commodity Prices; But High Cost Inflation Worries Farmers
The Purdue University-CME Group Ag Economy Barometer improved in April to a reading of 121, which was 8 points higher than a month earlier. Despite this month’s increase, the ag sentiment index remains 32% lower than its April 2021 reading. This month’s survey was conducted from April 18-22, 2022. Purdue ag economists James Mintert and Michael Langemeier review the results and give some insight into the April 2022 Purdue University-CME Group Ag Economy Barometer, a nationwide monthly survey of 400 ag producers. Slides and a transcript from the discussion can be found below.
The full report is available at https://purdue.ag/agbarometer.
Intro [Recording date: May 2, 2022]
James Mintert: Welcome to Purdue Commercial AgCast, the Purdue University Center for Commercial Agriculture Podcast, featuring farm management news and information. I’m your host, Jim Mintert, director of the Purdue Center for Commercial Agriculture. And joining me today is Michael Langemeier, a Professor of Ag Economics here at Purdue.
We’re going to review the results from the April Purdue University/CME Group Ag Economy Barometer Survey of farmers from across the nation. Each month, we survey 400 farmers across the U.S. to learn more about their perspective on the ag economy. This month’s Ag Barometer survey was conducted from the 18th through the 22nd of April. And Michael, for the first time in a while, we saw the barometer actually improved. So, Farmer sentiment rose a little bit this month from a reading of 113 last month to reading of 121 this month. That’s the good news. The bad news is it still leaves the barometer way below where it was this time last year. This time last year, the barometer was sitting at an index of 178. What’s your take?
Michael Langemeier: I think it makes sense that the barometer is quite a bit lower today than what it was last year. Simply because we do have strong prices for crop prices – particularly corn, soybeans and wheat. And other crop prices are also strong. But what’s different this year compared to last year? Last year at this time, we had not seen the surge in input prices that we’ve seen since last spring. And so, I think it’s the combination of those good prices, but there’s still that pretty high production cost. And I think that’s keeping sentiment considerably down compared to what it was a year ago.
James Mintert: I agree. And I also think it’s more than that. I just think it’s this overall tremendous level of uncertainty that’s made people very nervous about what’s going on. And when you think about sentiment, if you’re nervous, you’re probably not going to feel very good about it. And I think that’s what we’re picking up to some extent.
Michael Langemeier: That’s a good point. And I think inflationary expectations, because they’re uncertain, is contributing to all of this.
James Mintert: So, we’ve got some more information about input prices in particular. Later on, we’ll talk about that more. So, the Index of Current Conditions and Future Expectations both saw modest improvements. So, people became just a little more optimistic about both of those. And, you know, again, I think the rise in commodity prices probably explains that. I mean, you can’t escape the fact that for anybody that had inventories remaining from 2021, to sell here in 2022 – even if it’s a modest percentage of the total – that did improve their outlook. And then when you look at the new crop prices, they’ve improved as well and maybe in some directions that we didn’t necessarily anticipate. I mean, I think if you look at what happened with respect to USDA’s planting intentions for soybeans, despite that, we continue to see strengthen in soybean prices. And that’s filtering right back in here in terms of the Index of Current Expectations, and especially, I think, Future Expectations.
Michael Langemeier: What’s kind of interesting about where we’re currently at in terms of these two indices is the two indices are almost identical. They’re right around 120/122 for both indices. Typically one index is higher than the other. And so, I don’t know what necessarily to read into that, but it’s certainly a unique situation compared to where we’ve been historically. If you look at it historically, there was more, you know, the years before 2020, there was more optimism in terms of the Index of Future Expectations that would make sense. Returns were relatively tight during that all the way through 2019. As we got into 2020, the Index of Current Conditions was higher than the Index of Future Expectations. Now they’re about the same.
James Mintert: Yeah, you’re right. That is kind of unusual. And I think it reflects the fact that, you know, things aren’t great compared to what they were this time last year. Right. This time last year, we did have a different picture.
The Index of Current Conditions was significantly higher than the Index of Future Expectations. Now, I just think that gets back to this uncertainty. Right. People are thinking I’m uncertain about what’s going on today. And then perhaps I’m just equally uncertain about what’s going to happen one or two years from now. And I think that we’re picking that up in in the monthly surveys.
The Farm Financial Performance Index did improve. It’s the second month in a row that it went up. Last month’s rise was pretty small. It was only a four point move. This month, it was eight points. And so, I like to compare maybe where the index is now versus where it was in January and February. So the index reading was 95 for this month. You go back to January, February, it was 83. So, I think people are feeling better about their farms financial performance in 2022 compared to 2021. And that’s what the question really asks about in this particular one. Makes sense to me, right? If you look at what’s going on with commodity prices, by and large, crop producers clearly are looking at a stronger situation for 2022, despite the high input costs, right?
Michael Langemeier: Yeah. If you compare the index in April at 95 to the index in January at 83, I think it makes a lot of sense because crop prices have continued to improve. Particularly since that January 1 period, all the way through most of April. But at the same time, input prices really haven’t increased that much since January. They surged last fall and they really haven’t increased all that much from the January levels. And so that combination would lead you to believe that they’re going to be more positive in terms of this index.
James Mintert: Yeah. And not only that, I think with respect to the change in input prices that you mentioned, Michael. Even to the extent they have gone up a lot, those inputs have already been locked in.
Michael Langemeier: Yes.
James Mintert: For 2022. We’ll talk more about 2023 here in a minute because we did ask a question about what people are thinking about for 2023.
But the Farm Capital Investment Index went nowhere. It’s sitting at 36, which is the all-time low for that index, two months in a row now. You go back to April of 2020, that was one of our previous lows. It was a 38. So, we’re basically back to where we were two years ago, right at the onset or near the onset of the pandemic. So, people are not feeling very good about whether or not this is a good time to make a capital investment in their farming operation.
But despite that, this is always the big conundrum. Every month you and I read things from Machinery Pete, talking about how strong used farm machinery equipment prices are. I think just about every email says he set a new record on whatever item he was looking at that day. We look at continued very tight machinery inventories at the dealers. So obviously people are buying stuff, right. But they’re telling us it’s not a good time to make those investments. This is very interesting and I think it ties back in part to the fact that 40% of the producers each month, really it ranges between about 40 and 45%, tell us that their purchase plans have been impacted by tight machinery inventories. So how do you explain the conundrum here?
Michael Langemeier: This is really difficult to explain, but I think there’s several things going on. I want to go back to something you said earlier. I do think this uncertain environment is impacting this. But I think also when somebody is posed with this question, they think “My goodness, prices are really high and the inventory levels are really low.” So, it’s not a good time. And so, they’re not necessarily thinking, “Well, I have a strong cash flow.” And so, this is a good time to purchase machinery. They’re going beyond that. That’s typically how I think about, you know, think about machinery purchases while I have good income. So that means that I need to invest in equipment. I think they’re thinking a little bit beyond that and say, “My goodness, these prices are high and I can’t find what I really need. You know, maybe I should just wait.”
James Mintert: Yeah, I think in some cases they’re saying it’s not a good time to do it, but that same person might be the one that actually bought the tractor.
Michael Langemeier: Yes.
James Mintert: In a machinery auction, you know. Yeah. And I think part of it relates to the idea when you think about is it a good time to make investments? Some people, I think in particular are saying “Can I get a good deal?”
Michael Langemeier: Yes, I was going to say that.
James Mintert: And, you know, for many of us, historically, when you’re paying list price, or in some cases above list price, you’re paying new prices for used farm machinery. You’re saying this is not a good deal, but it still might be something you choose to do. For a variety of reasons, whether you want to upgrade technology wise. One of the things I picked up recently, and I hadn’t thought too much about this previously, is that some folks, given the difficulty they are having in obtaining farm machinery parts, are actually interested in acquiring backup equipment. One of the auctioneers I heard on a Machinery Pete podcast recently commented that he felt like some of the people at his auctions were actually buying equipment as sort of a backstop in case they couldn’t get parts. For example, a planter tractor and they wanted to be able to swap it out. That was news to me. I don’t know how much of that might be going on, but that’s a contributing factor, I suppose, at least in some locations. And some auctions for example.
The Short-Term Farmland Value Expectation really didn’t change much. It came in at a reading of 144. That is down from where it was last fall. Last fall I think we peaked at about 157. So, it’s down. The Long-Term Farmland Value Expectation Index is also down. It did decline a little bit this month. It went to 141 from 146. And again, when you compare it to last fall, it’s well below where it was last fall. Last fall that topped out at 161. So, we’re down about 13% compared to where we were last fall. Even if you average it out, you know, Michael, you and I have talked about using a three month moving average here to kind of smooth out some of the month to month changes. Even when you look at it that way, we’re down 7 to 8%. So, this is interesting. I think people aren’t negative on farmland values, but they’re, I think, starting to communicate to us, given how rapidly they’ve gone up the last roughly 18 months or so, they’re not optimistic it’s going to continue to go up. Is that your take or something different?
Michael Langemeier: No, I think that’s exactly right. I think they’re still relatively optimistic about farmland values in general. I mean, they’re not expecting them to decline, you know, in the next five years necessarily. There’s a few, but not that many are expecting that. But yeah, given the large increases that we’ve seen across the Corn Belt and Plains, it’s not all that surprising. They’re starting to ask, can this continue? I mean, you know, we saw a 20, 25, 30% increases in the last year, depending on the state you’re looking at. And you’ve got to scratch your head and say, yeah, the returns are good, but are they that good? That we can continue to see these rapid increases in land values.
James Mintert: Yeah, I think we’re starting to pick up some skepticism on the part of producers with respect to how long this can go on. And it’s going to be interesting to see how that plays out. Here as we continue to watch, you know, auction results from this spring, late winter and early spring, pretty much records every time you read about a new auction result. So clearly there is some interest out there in terms of buying farmland. The other factor that I don’t know that we’re picking up on this survey yet, but it’s going to be interesting to see how it impacts future responses is going to be what’s taking place with interest rates. And we’re recording this just a couple of days ahead of when the Federal Reserve is going to make an announcement. Everybody’s expecting them to raise the rates. The question mark is how much. At some point, if we continue to push rates higher here over the next year or so, that’s going to have some impact on farmland values, don’t you think?
Michael Langemeier: Definitely. Another contributing factor is, and I get questions and I know you do too, what’s ‘23 going to look like? Are we going to have relatively high input prices and are crop prices going to come down? And so, what are the margins look like for ‘23? And, you know, obviously, that’s a very fuzzy crystal ball at this point. So, as I get a little more clarity there, I think that will also be very important to their land value expectations.
James Mintert: Well, let’s talk a little more about input prices and farmer’s expectations. And first, I’m going to start off talking about what people say is taking place here in 2022 versus 2021. And then we’ll come back and talk about 2023 expectations versus 2022.
So far producers are telling us, we asked them, how much do you expect price paid for farm inputs for the 2022 crop year to change compared to the 2021 crop year? And this was a bit of a change. 46% of the people in the survey said they expect to see input prices 40% or more higher than last year. I’ll say that again. 46% say they expect to see input prices paid in 2022 to be 40% or more higher than in 2021!
And Michael, you’ve taken a look at the USDA index of farm input prices. To say that’s off the charts kind of understates it, right?
Michael Langemeier: That’s definitely the case. And it’s not just one input. I mean, we often talk about fertilizer. Obviously, fertilizer prices are up substantially, but it’s also diesel, repair parts are up substantially, machinery values, we talked about that earlier, they’re up substantially. And so, it’s several very important costs that are up quite a bit when you look at ‘22 compared to ‘21. But I still have a little shock that 40% or more, 46% expect that, it’s just unbelievable. You know, when you start talking those kind of numbers, because a 10% move is big.
James Mintert: Yeah, that’s and we should point out, we had people in other buckets, right? So, 14% of the people said they thought it’d be up 30 to 40%. 15% chose a 20 to 30% increase. 16% said plus 10 to plus 20%. And only 9% said no change up to 10%. So when you think about that, Michael, I mean, people are really on the high end of this. And I think it reflects what you just said. Every single category is up. You can debate the percentage increase on some of those, but every single category is high.
Michael Langemeier: And not just 1 or 2%, they’re up substantially. Just to put that in a little bit in perspective, I went ahead and looked at historical USDA NASS Prices Paid Indices, going back to 1973. There’s only been about six years since 1973 where we’ve seen input prices increase double digits. And so that just puts in perspective how unusual this ‘22 really is compared to where we’ve been the last 50 years.
James Mintert: And I think looking at those six years, if we broke those out, Michael. I don’t think any of those years would have been years when every single input is up.
Michael Langemeier: No.
James Mintert: That’s the curve.
Michael Langemeier: And we’re going to start talking about ‘23 here. It’s extremely rare to see two years in a row where you see double digit increases. We did see that in that ‘79 to ‘80 period. Very high inflation period, both in terms of general inflation, but also inflation in agriculture. And so that’s kind of what we’re looking like again in agriculture is a similar situation to we saw in ‘79 and ‘80.
James Mintert: So, we did a follow up question. We said, have you had any difficulty in purchasing crop inputs from your suppliers for the 2022 crop season? We’ve been asking this question for several months in a row. And the percentages saying yes changes a little bit each month. This month it was up a little bit. It was 34%. In the prior months we were down in the twenties, so I was a little surprised there. But I think maybe that reflects the fact that as we got closer to planting season, people were stepping in and maybe trying to fill in that last couple of inputs they hadn’t locked in. And discovered they weren’t available.
Michael Langemeier: Herbicides, fungicides, insecticides, some of those kinds of things. I actually had a couple of reporters asked, “What does that look like a year or two ago?” And the way I respond to that, we didn’t ask that question because it really wasn’t a big issue or an issue at all. If you go back a year or two years, again this is a very unusual situation.
James Mintert: Yeah. Instead of 34%, if we’d asked that two or three years ago.
Michael Langemeier: Closer to zero.
James Mintert: I would have said either zero or maybe a couple of percent or something like that. We did the follow up for the folks that said they had trouble. So that 34%, that said they had some difficulty. We said, well, what are the problems? What are the which inputs did you have the most difficulty with? And again, it continues to be pretty much across the board. Herbicides, as you mentioned, was tops. That was 30%, but that was only a little bit higher than farmer machinery parts at 27%. Fertilizer was at 26%, the one that seems to come in lower, is insecticides. That might reflect the fact that fewer people maybe are purchasing insecticides for all their crops. So, across the board, I mean, it’s a supply chain problem in multiple areas, not a single area.
This was a new question this month. Have you received notice from a crop input supplier that they will not be able to deliver one or more crop inputs you purchased for crops in 2022? So, the idea here was you’ve already made the purchase, suppliers already agreed to deliver it, and then they gave you a notice that they can’t deliver. 11% of the producers said they had received a notice like that, for one or more inputs. And we did the follow up. And as you mentioned, Michael, the top one mentioned here was clearly herbicides. That was the biggest issue, but it was followed by farm machinery parts, fertilizer and insecticides. So again, it was across the board, herbicides was the biggest single issue. And we’ve been talking about that with our weed scientist here at Purdue. And he’s mentioned this and been telling producers, I think, going back to last fall, you need to have multiple plans in place. Because you’re going to run into this where your number one product that you want to use might not be available, or in short supply, and have the fallback plan. I think that’s what these folks are running into, right?
Michael Langemeier: Yeah, I think that’s exactly what they’re running into.
James Mintert: So, we’ve asked people again this month, looking ahead to next year, what are your biggest concerns for your farming operation? Higher input costs is the number one issue. 42% of the people said that’s their top issue. Availability of inputs, almost one out of five. 19% of the people in the survey said availability of inputs was one of their top concerns for the upcoming year. And a little bit like the reporter asked you, Michael, we didn’t ask this question last year. But in a normal year, I don’t think hardly anybody would say availability of inputs was going to be a big concern.
Michael Langemeier: Even the higher input cost. Maybe if you go back to when cash rents were increasing double digits. You know that 2010 to 2013 period. Higher input costs would have showed up and been on the radar. But not at 42%. And so, you know, typically you expect crop and livestock prices and policy to be much more important in terms of a biggest concern than inputs. But obviously, inputs are on people’s minds.
James Mintert: Yeah. And to put that in perspective, you mentioned lower prices, which in a more normal time would be probably the biggest concern. 18% did say lower crop or livestock prices, which essentially matched that availability of inputs. But that’s very surprising, that availability of inputs would be of the same level of concern, approximately, as lower crop or livestock prices. That just tells you how topsy-turvy things are in the ag markets, right now.
For the second month in a row, we asked this question, in what aspect of U.S. agriculture do you expect the biggest change as a result of the war in Ukraine? And really the response didn’t change hardly at all. 60% said input prices was going to be the biggest impact. 36% said crop prices, and just 4% said livestock prices. And we didn’t do a follow up on this. Maybe we should next month. But when they say input prices, I think what they’re really looking at is fertilizer, right?
Michael Langemeier: That would be my guess.
James Mintert: Yeah. And that’s not easily resolved. That’s how I would put it.
Michael Langemeier: And I think its nitrogen and potash. Would that be the two major fertilizers that would they be of concern?
James Mintert: Yeah, I think so. Yeah. And so, I don’t see that getting resolved in the short run. And I think people are going to continue to face that as an ongoing issue.
So, this is a new question this month. Really kind of a response to a reporter who asked me this question a month ago and I didn’t have a good answer. So, we decided to ask producers. And that is looking ahead to crops that will be planted in 2023, what change do you expect for 2023 crop input prices compared to the prices paid for 2022 crop inputs?
Keep in mind, we’ve already asked them what they think ‘22 is going to be versus ‘21. And they’ve already told us they expect to see a big increase in crop input prices here in ‘22 versus ‘21. So, then we asked about ‘23. 36% of the producers said that they expect to see input prices next year rise 10% or more compared to the already elevated levels they’re experiencing here in 2022. And if you want to slice that down one level further, Michael. 21% said they think input prices next year will be up by 20% or more. And this kind of gets at what you looked at earlier, which is how often do we see double digit increases in input prices back to back?
Michael Langemeier: Very rare. I mean, like I said, the only period since ‘73 where we’ve seen that is ‘79 and ’80. Where, you know, people that were around during that period of time, which you and I were, I was an undergraduate, but I was still studying that a little bit. There was very high inflation period for the general U.S. economy. But also for agriculture. And so, it’s just very unprecedented to see this large of increases back to back. And just to give you some perspective here, we talked about that large increase in ’22. The largest increase since 1973, if you look at the USDA NASS Prices Paid Indices, was in 2008. Coming off a very profitable 2007 period. Input prices increased 17%. In 2009, they actually dropped, slightly. And so, you are seeing these very large increases that we’re seeing in ’22, and then in ‘23 seeing double digits. We haven’t seen that. We just haven’t seen that in the last 50 years.
James Mintert: So, let’s think a little bit about what happened in 2008 versus 2007. It was really a different environment.
Michael Langemeier: Yes.
James Mintert: That price rise was really all attributable to a worldwide shock on the output price side. Which increased the demand for fertilizer. We didn’t have a shortfall in supply. We didn’t have anything taking place then that was pulling back on the supply side. We simply had this big shift on the demand side. That gave us higher prices. And in turn, that really set the stage for things to maybe fall back a little bit in 2009. This situation is different. We’ve got strong demand coming out of high crop prices, but we’ve also got the restriction on the supply side. So that’s really exacerbated what’s taking place. And makes it very difficult to forecast how this is going to play out over the next, say, year, particularly the next couple of years. Right?
Michael Langemeier: It’s hard to imagine a scenario where these producers aren’t close to being right in ’23. Where we’re not going to continue to see some relatively high input prices. There is a scenario out there that, you know, maybe we have record yields everywhere in the U.S. and in South America, and other places. And Ukraine is able to produce more than we think they think they’re going to be able to produce this year. Maybe in that situation, if supply would increase, maybe we would see some less pressure on these input prices. But it’s hard to paint a scenario where that might happen.
James Mintert: Yeah, I really think for folks that are trying to figure out and this was a lot of discussion last fall in particular, whether or not we might see input prices, especially fertilizer, revert back to what we would think of as more typical prices in the fall. Say in ‘23 and certainly getting ready for the ‘23 crop. And given what’s taking place so far on both the demand side and the supply side. It’s hard to see these prices really dropping back. And I’m kind of with you, Michael. I think the risk is that we’re going to see even more elevation in those prices going into the ‘23 crop season than what we’ve already experienced. Whether or not it turns out to be as high as what producers are telling us, I don’t know. But I don’t see those prices dropping back.
Michael Langemeier: Yeah, I think that’s true for fertilizer. There’s probably going to be increased pressure for seed prices, for example. Because, you know, the demand situation. But the other uncertainty here is what’s going to happen to general inflation. There’s several input prices, wages, repairs, machinery. These type of inputs follow general inflation. So, if general inflation stays relatively high, you know, similar to where it is today. That will also say that those inputs are going to have some inflationary pressure.
James Mintert: So, all of this, I think, gets back to why sentiment is as weak as it is. It’s people are very concerned about cost of production and what’s going to happen to their margins. There’s uncertainty on the output price side. They’re fairly confident that input prices are going to continue to rise. And so that creates this issue in the back of people’s minds, with respect to a potential cost price squeeze. Right. That’s really what think people are telling us and really worrying about.
Well, Michael, that wraps up our discussion for today. For more details about the Purdue/CME Group Ag Economy Barometer, go to our website, which is purdue.edu/agbarometer. The next Ag Economy Barometer will be released on Tuesday, June 7th. And of course, you can find more information about that and register for all the emails to come out on the barometer on our website. So with that, I encourage you to share the podcast with your friends and colleagues. And on behalf of Michael Langemeier and the Purdue University Center for Commercial Agriculture, I’m James Mintert. Thanks for listening.
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