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The full report is available at https://purdue.ag/agbarometer.

 

Audio Transcript

Intro [Recording date: June 6, 2022]

James Mintert: Welcome to Purdue Commercial AgCast, the Purdue University Center for Commercial Agriculture’s 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.

0:21

James Mintert: We’re going to review the results from the May 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 perspectives on the ag economy. This month’s Ag Barometer survey was conducted from the 16th through the 20th of May. And Michael, there’s no way to get around this. The barometer plummeted, right? I mean, we had an index reading of 121 in April. This month’s reading was 99.

I didn’t go back and double check but that’s not the biggest single month decline we’ve seen but it’s close, right? It’s certainly one of the biggest we’ve seen since we started collecting data back in 2015.

Michael Langemeier: Yeah, that’s definitely the case. And again, we’re living in a very unique environment where there’s a lot of uncertainty and I think a lot of that uncertainty is related to inflation, which is tied to uncertainty related to input prices and input costs.

James Mintert: Yeah, you mentioned inflation. And of course, the issue for so many people in agriculture as they look at consumer inflation and the inflation they’re facing in the ag sector is multiples of what we’re looking at on the consumer side. Right. So that’s been a huge issue going forward here.

1:34

So, let’s take a look at the Index of Current Conditions and Future Expectations. They both fell sharply. That’s not too surprising. The Index of Current Conditions fell to a reading of 94. That’s a 26 point decline. And The Future Expectation Index fell 21 points to a reading of 101. So big declines on both of those. People were very uneasy about what’s going on today in their farming operation and uneasy about where it’s headed right now. No big surprise, though, given what’s going on with the uncertainty.

Michael Langemeier: Another interesting thing to me is for the first time in about 18 months, if not a little longer, the Index of Current Conditions is lower than the Index of Future Expectations. Which is really curious to me, because I I’ve been telling people that ‘21 and ‘22 looks like they could be pretty good years and then we could see a drop in net returns. That’s not exactly what they’re thinking right now. They’re thinking that ‘22 is not going to be that good. And maybe it’s related to this uncertainty. It looks fairly good if you look at prices in the fall. But we’ve got a long way before we hit the fall and we actually receive those prices.

2:41

James Mintert: Yeah, that’s true. And the uncertainty is just across the board. There’s uncertainty obviously about this year. Before the broadcast started here, Michael, you and I were talking about what’s going on with fuel prices and even fuel availability. People are starting to get worried about that. They’re worried about what’s going to take place in ‘23. So, it’s just across the board. And, you know, I thought it’d be useful this month to look at one of the underlying questions that we actually use to compute the ag economy barometer.

And one of those questions says, would you say that your farm operation today is better off, worse off or about the same financially compared to a year ago? And if you look at the chart, and I realize we’re doing a podcast here, but if you look at the chart the change from April to May is quite stunning. The percentage of people who said worse off in April was 38%. That jumped to 54% in May, and the percentage of farmers who said better off was 23% in April, and that dropped to 14% in May. So, it’s a stunning change.

And if once again, if you’re looking at the chart, you go back over the last roughly 12 months, you can just see the divergence that’s taken place with this rise in percentage of people saying that they’re worse off and correspondingly the decline in people saying that they’re better off. So, it’s really interesting to look at that.

Michael Langemeier: Yeah, and the worse off is getting close to what it was right at the start of COVID. That’s what’s truly amazing to me. I mean, there was a lot of pessimism on that April and May of 2020, and we haven’t quite hit those levels yet in terms of this question, but it’s getting close.

James Mintert: Yeah, that’s a good point. And for reference, in those early days of COVID, that percentage saying worse off was up around 70%. So, you’re right, it’s going to be interesting to see what we see in the upcoming survey that we conduct here in June, but a very stark change.

And then if you look at some of the other questions that we use to actually compute the ag economy barometer index, very similar kind of change in responses from April to May. People just became a lot more negative in May versus where they were in April.

4:51

The Farm Financial Performance Index, again, no big surprise given what we’ve said so far. It plummeted as well, dropped to a reading of 81. It was down from 95 last month. That’s the lowest reading of this year back at the beginning of the year, I think in January and February we were at 83. So, this is the lowest level we’ve had this year and actually the lowest level we’ve had on that index since the late spring and early summer of 2020. So again, people are very negative about what’s taking place.

And again, you and I were kind of talking about this earlier before we started recording. And it’s kind of hard to explain exactly why that farm financial performance index dropped so sharply in one month’s time. Part of that probably is related to the fact that we saw weakness in some of the key commodity prices like corn and soybeans. They’re still at elevated levels, but they’re not as high as they were earlier in the spring. And that might contribute to part of this. What else do you think’s going on there, Michael?

Michael Langemeier: We’re going to talk about this some more, but I think it’s also inflation and possible input costs in 2023 look higher than they did even a month or two ago. So. And so we just keep seeing more inflation in the economy. And I think that’s scaring people.

James Mintert: Yeah, again, I think it’s this combination of uncertainty and use the word scare. I think people are very, very uncertain about what’s taking place here in the short run and then longer term, and maybe it is a little bit of a scare situation. These are unprecedented times in terms of the level of uncertainty that we’re having across the board here. The Farm Capital Investment Index really didn’t change this month. I think technically it was a one point decline, but that’s virtually no change. That was at 35, which I believe is certainly a new low point for that index. But again, not much of a change from April.

6:43

The change, though, was in the follow up question. Of course, we’ve been asking a couple of follow up questions now for quite some time. Asking people has the tight farm machinery inventories impacted their farm investment decision making? And we’ve also asked something corresponding with respect to buildings and grain bins. And in May, 50% of the producers said that their purchase plans have been impacted by low farm machinery inventory levels. That number has been pretty high for some time, but it has not been 50%. In fact, last month, in April, it was 41%. So that 50% does represent a change. Now, it’s going to be interesting to see if that change follows through over the course of the rest of the spring and summer. But that does tell you that people are really struggling to make investments and make investments of the kind of things that they really need or want. Right?

Michael Langemeier: I think it’s a combination of this low machinery, inventory levels and very high prices for used machinery. I think as long as those two things persist, this is not going to ratchet up quickly. I think there’s cash flow out there. I still think there’s cash flow out there from ‘21. Obviously, it was a really good year for crop producers and I don’t think ‘22 is going to be that bad. So, I think the cash flow is there, but I think they’re going to second guess whether this is the right time to use that cash flow to buy machinery.

James Mintert: You’re right about the cash flow situation because the prices being paid at the used machinery auctions have been off the charts. And that’s indicative of very strong demand and relatively tight supply. And actually, a shift in many cases of people moving away from wanting to purchase new, which wasn’t available, to dropping back and purchasing relatively new or relatively recently made machinery in those used equipment auctions.

8:38

So, if you look at farmland values, you know despite the weakness in The Farm Financial Performance Index, The Long-Term Farmland Value Expectation Index actually rose eight points to a reading of 149, up from 141 last month. And I guess the first thing I want to point out is that’s still significantly below where it was last fall. Last fall, that index topped out at 161. So, people are not as optimistic about farmland values increasing from this point going forward as they were in the fall, but that’s still a relatively optimistic number, that 149. If you look at the history, that index has been kind of trading in a range of maybe about 140 up to that 161 we mentioned, but kind of hanging in that 140ish range, close to 150, which is relatively optimistic. If you look at the data we’ve been collecting since on this case of the long-term index going back to 2017, right?

Michael Langemeier: Yeah, I think the cash flow uncertainty and the uptick in interest rates must not be impacting people’s views in terms of farmland. And so those must not be the driving forces when they’re thinking about farmland values.

James Mintert: Yeah, I think that’s worth reiterating a little bit or maybe expanding on Michael. So, you know, as economists, you and I tend to look at farm financial performance and expect to see a strong correlation between that and farmland value expectations. And yet, when we’ve asked the follow up question of people who say they expect to see farmland values rise. The top two reasons they’re given us on that question now going back several months is, number one, non-farm investors. That’s their number one reason why they think farmland values are going to rise over the next five years. And the number two reason they’ve been giving us here recently has been inflation. And so, we tend to think about farmland being driven by farmland economics or farm economics. And they’re telling us that, yeah, that’s a factor, but that’s not the number one reason. They think it’s going to be people coming in from elsewhere looking for an investment opportunity and that’s going to continue to support farmland values.

Michael Langemeier: And another thing we need to talk about here is even though the interest rates are ticking upward, if you look at a real interest rate, you know, nominal interest rates, subtract inflation. They’re negative in a lot of cases. And so that uptick in interest rates really is not affecting farmland values because inflation is so high.

James Mintert: That’s a good point. It’s going to be interesting to monitor that going forward and see how long this continues. And of course, the other factor going on there is when we ask people this question, I think they’re probably looking at what’s been taking place at farmland auctions in their home area. And of course, those continue to be very, very strong here through the spring.

11:30

We’ve been asking people the questions about what’s taking place with respect to input cost in 2022 versus 2021. And we did that again this month. How much do you expect the price paid for farm inputs for the 2022 crop year to change compared to the 2021 crop year? And 43% said 40% or more increase. And that is very close to what we got for response in April, I think it’s within one or two points of what they told us in April. Another 15% said they think it will be up 30 to 40%. So if you add those two together, you got 58% of the people in the survey said that they think farm input prices this year are going to be up at least 30%. And a big chunk of them think it’s going to be up at least 40%.

Michael Langemeier: You were mentioning earlier that input prices have risen much faster than inflation. And I think this chart clearly shows that. If you look at inflation with CPI or implicit price deflator, those two measures, 7-8% would be they would be the inflation in the last year. And here we’re talking some four times higher than that.

James Mintert: Yeah, they the magnitude is kind of off the charts for I think most of us.

12:43

The last two months now we’ve asked this question: Looking ahead to crops that we planted in 2023, what change do you expect for the 2023 crop input price as compared to 2022? And, you know, I think it’s important to remember that means we’re asking them to compare it to the already inflated values that they’ve observed here in 2022. And roughly one out of five, both months, both in April and May, roughly one out of five told us they expect to see inputs go up another 20% or more in ‘23 compared to this year. This month, we had another 20% that said they thought it might be 10 to 19%. So, very few people expecting a decline in input values going forward. We have that, one of the buckets says you actually expect to see input prices decline as much as 10%. That percentage did fall this month. So, there’s less. You know, I think early on there was an idea that, well, we’ve got this big inflation in input values here in 2022 and 2023. Maybe things will get back to normal. Fewer people are telling us they expect it to get back to normal in 2023. Would you agree with that, Michael?

Michael Langemeier: Yes, and I think this slide is explaining the large drop in the index of future expectations. If you’re expecting these input costs to persist and go higher in ‘23, you’re not going to be overly optimistic about the next five years.

James Mintert: Yeah, I continue to think that one of the issues people are thinking about is they know from history when input costs go up, yes they can come down later, but they’re sticky. They’re pretty sticky. And yet we know that output prices can be very volatile. And I think in the back of their minds, people are worried about a cost price squeeze.

Michael Langemeier: Definitely.

14:32

James Mintert: So, we’ve been asking this next question going back to December and it’s have you had any difficulty in purchasing crop inputs from your suppliers for the 2022 crop season? And Michael, I’m going to characterize this is good news, but in a qualified way. We had the lowest percentage of people tell us that they had experienced difficulty on this month’s survey than we’ve had all the way back to December. However, we still had one out of five. 19% say they had some difficulty in purchasing the crop inputs that they wanted from their suppliers. Prior months that’s floated between, oh, I think on the low end, 27% to as high as 39% back in December. So, I guess the good news is fewer people are telling us they had trouble. And it’s a little hard to interpret exactly what they mean by trouble because the question is fairly open ended. What’s your take?

Michael Langemeier: Yeah, I think part of what’s going on here is as we got closer to planting, they might’ve had to scramble to get the inputs, but they got the inputs. And so that’s how I’m interpreting this drop. Yes, we did have trouble this spring, but as we got close to planting, we did get the fertilizer we needed. We did find the seed. We did find the herbicides that we needed to put the crop in.

James Mintert: Yeah. I think in this upcoming survey we might think about phrasing a new question that basically tackles that idea because that’s sort of my interpretation as well. I think there were a lot of people having to go with second best alternatives or maybe even third best alternatives. But I haven’t heard any stories and we really haven’t picked this up in the survey where people have told us that they simply weren’t able to get a key input that they needed. They simply had to scramble to get it. So, I think that’s more likely what was taking place there. But we’ll follow up on it on a future survey and maybe try and elicit more information there. Among the people that told us that they had difficulty, though, we’ve asked a follow up question and we’ve been doing this for several months.

16:30

Which crop inputs have you had difficulty purchasing from your suppliers? And the answers continue to be pretty much across the supply chain. Michael. I mean, this month it was 29% said herbicides. That was number one. But boy, it was followed very closely by farm machinery parts, 28%. Fertilizer was 26, insecticides was 17%. So that tells me that we’ve still got issues pretty much across the board in the supply chain. Not that people were flat out unable to get inputs, but they had to take steps that they didn’t normally take to get those inputs. Is that kind of where you’re at?

Michael Langemeier: Yes, that’s definitely how it interpreted. It’d be interesting to see if we can, I don’t know if we’re going continue to ask this question, but if we continue to ask this question, if insecticides doesn’t get a little bigger because maybe we’re going to have difficulty with fungicides.

James Mintert: Yeah, that’s a good question. The fungicide issue might be a bigger issue here in what, late June, certainly in July, maybe spilling over into August. So, yeah, you’re right. And it could be a function of, you know, I need something now. Can I get it this week or the day that I want it?

We’ve been asking, I think, for several months now, looking ahead to next year, what are your biggest concerns for farming operations? And, you know, by now, probably no surprise, given what people are telling us about input costs, that is the number one issue. 43% said higher input cost is their number one issue. Number two issue, and this maybe is a little bit of a surprise, is availability of inputs. One out of five, 20% pick that as a as a top issue. Lower crop and or livestock prices came in third place at 17%. And I guess if there has to be a surprise, Michael, we don’t have a long history of multiple years of asking this question, but based on our experience, I think in more normal times you would expect to see lower crop and or livestock prices as the number one issue.

Michael Langemeier: Yeah, I think it’d be the largest issue and I don’t think higher input costs would be chosen by very many people. If you go back even a year and then certainly availability of inputs that we wouldn’t even probably ask that a year ago or two years ago. And so that one there is really interesting that 20% indicate that’s their biggest concern over the next year.

James Mintert: And again, I think that explains an awful lot of the weakness that we’re seeing in the barometer, the index of future expectations, index of current conditions. I really think these are the keys. The fact that we’ve got some key issues on producer’s minds that normally wouldn’t be there.

19:10

We asked a few questions on this month’s survey on the policy side. Primarily because the Biden administration had floated the idea of offering a double crop/soybean crop insurance reduction. To encourage people to plant more wheat and then follow it up with double crop. So in other words, what they were trying to do is encourage people that live in a region where wheat and double crop soybeans was a viable cropping rotation to consider planting more wheat this fall to increase wheat supplies. We asked a few questions to kind of get just a little bit of an overview in terms of what people are thinking about that. So, the first question we asked was, have you utilized a wheat double crop soybean crop rotation at any time in the past? And this went to all the crop producers in our survey. 39%, roughly four out of ten said, yeah, I’ve used a wheat double crop at some point in time in the past. And then we came along and asked those folks that said, Yes, I’ve done this in the past, do you plan to increase the percentage of your farm’s cropland devoted to that wheat double crop/soybean crop rotation by planting more wheat in the fall of 2022? And just over one out of four, 28%, said yeah, they do plan to plant more wheat. What do you make of that, Michael?

Michael Langemeier: This is really interesting because first of all, I think we need to go back to the demographics of the survey. 53% of the survey respondents are predominantly corn and soybeans. That doesn’t mean they don’t have other enterprises, but corn and soybeans is their predominant enterprise. I think wheats like 15 to 20%. And so when you see 40%, you’re pulling in more than just your traditional wheat producers. You know, perhaps that’s obvious. Perhaps not. And when you see 28% plan to increase their wheat acres, that’s more than just the wheat producers. You’re pulling in people, for example, perhaps from southern Illinois, southern Indiana and Kentucky, where they produce a lot of corn and soybeans, but wheat double crop is a rotation that they sometimes use.

James Mintert: Yeah. And it’s a rotation for thinking about it here in Indiana, Michael, that has really kind of gone by the wayside in recent years. The wheat double crop acreage has been declining for a number of years as people have shifted towards more of a corn soybean rotation. But it is interesting. I mean, it tells you that people are looking at the price ratios. Right. Because if you look at it and I know, Michael, you’ve taken a look at these budgets that wheat, double crops, soybean rotation here in Indiana, southern Illinois, Kentucky. Looks pretty profitable, right?

Michael Langemeier: It looks very attractive for 2022.

James Mintert: And that’s going to pull some acreage in. So I think, you know, one point that both of us have made in some interviews with various people in the press and elsewhere, is the prices are going to encourage people to do things right. I think there’s a lot of concern about how can we increase wheat acreage. Well, I think producers in the aggregate do look at the price ratios and do look at picking profitable crop rotation. So, I do think we’re going to see an increase in in that rotation here in Indiana, for example, southern Illinois, parts of Missouri. You mentioned Kentucky. Tennessee. Right. Those are all prime double crop soybean regions. I think we’re going to pick up some acres. Our survey doesn’t do a good job of estimating how big of an increase in acreage it’s going to be. What we’re picking up, though, I think, is interest in this possible transition.

And then the follow up, which is really what kind of motivated us to include these questions on the survey this month. Was this proposal floated by the Biden administration to have a subsidy on crop insurance for people that planted wheat and then followed up with double crops, soybeans. And the subsidy that they proposed, or at least initially, was a $10 per acre subsidy. So, we followed up and asked this question to two different groups. We asked it to the people that have planted a wheat double crop/soybean rotation in the past. And then we followed up and also asked this question to people who have not planted wheat, double crop soybeans in the past. And so when we asked it of people who have actually used that wheat double crop soybean rotation, 22% of them, roughly one out of five, said that that crop insurance subsidy would have an impact and would encourage them to plant more wheat in the fall than otherwise would be the case. And then when we followed up and asked people that historically have not planted that wheat double crop soybean rotation, just 10% of them, one out of ten, said that that would encourage them to potentially plant more wheat this fall. So, Michael, you look a lot at crop insurance. What’s your take on this?

Michael Langemeier: I think the $10 subsidy maybe would get people to look at this a little closer. But I really think that the driver here is going to be if that wheat price remains strong. I think that’s going to really drive the decision to plant more wheat in the fall of 2022.

James Mintert: And I’m inclined to agree with you. I think it’s the price ratios that are going to matter. And the prices are sending a pretty strong signal to Corn Belt producers. That this is a profitable rotation. One limitation for some people might be equipment. Not every corn and soybean operation still has a grain drill. So, there could be some issues there. There’s always some things that kind of hold people back when you talk about transitioning to an enterprise they haven’t been using lately, but I would be very surprised if we don’t see more wheat go in Indiana this fall, southern Illinois. And when I say southern Illinois, probably the southern half of the state. Missouri. So, it’s going to be interesting to see how that shakes out. But I think we are going to see an increase in that wheat acreage. It’s going to be a crop rotation that people are going to want to take a close look at.

25:07

Well, that wraps up our discussion for today. For more details, you can go to our website: purdue.edu/agbarometer. The next Ag Economy Barometer will be released on Tuesday, July 5th. And with that, I just want to 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 Jim Mintert. Thanks for listening.