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March 7, 2023
Farmer Sentiment Dips in February
Purdue ag economist James Mintert and Michael Langemeier break down the February Purdue University-CME Group Ag Economy Barometer and share some insights into the farmer sentiment dip. The Ag Economy Barometer dipped 5 points in February to a reading of 125. Farmers’ perspectives regarding both current conditions on their farms and their expectations for the future both weakened. This month’s survey was conducted from February 13-17, 2023.
00:34 – Overview of Survey
04:29 – Farm Financials
07:04 – Farm Capital Investments
10:59 – Farmland
16:24 – Plans for Growth or Retire/Exit
19:08 – Solar
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, James Mintert, director of the Purdue Center for Commercial Agriculture, and joining me today is my colleague, Dr. Michael Langemeier, who’s the associate director of the Center. We’re gonna review the results from the February 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.
[00:00:34] Overview of Survey
James Mintert: This month’s Ag Barometer survey was conducted from the 13th through the 17th of February. Michael, the Ag Economy Barometer was down five points this month to a reading of 125 that’s down from 130 last month, and essentially leaves the barometer unchanged from where it was this time last year, but still 40 points below where it was two years ago. I guess my first question, Michael, is were you surprised that we saw this downward trajectory this month?
Michael Langemeier: I really wasn’t. There’s two things that are going on and one of these has been going on for quite some time. We still have relatively high input costs. Yes, inflation is down, but if you look year to year, we still have some relatively high input costs. And so that’s certainly dragging the barometer down. Another issue here is as we look into the fall of ’23 for example, we’re looking at some lower net returns, particularly when you look at the Index of Future Expectations, I would expect to be some more weakness in that index.
James Mintert: Yeah. You bring up that Future Expectations Index. It was down six points in February compared to January. That leaves at about 1% lower than it was a year ago. The Current Condition Index is only down two points compared to last month, and that’s actually slightly higher than it was in February of ’22. So, I think you’re right. I think the future expectations was kind of pulling things down and people are starting to worry a little bit about how many dollars they’ve got invested in a crop going into the ground this spring versus what they might wind up selling it for in the fall. And I think that’s starting to weigh in people’s perspectives just a little bit.
One of the other things that we kind of highlighted this month is something we track on a long-term basis, but don’t often actually feature. And that is people’s perspective on what’s going to take place in the ag export market. So going back to the beginning of 2019, we started asking a question every month. It says, over the next five years, do you think agricultural exports are more likely to increase, decrease, or remain about the same? And there’s been a long downtrend with respect to the number of people who think we’re going to see ag exports increase. The first few times we asked this question, the responses ranged between about 60 and 70% positive, expecting exports to increase. Topped out I think in early ’20, at about 72%, said they thought exports would increase. And then since that time, it’s been in a pretty steady downward trend. And this month we’re down to just 33% of the respondents in the survey actually think we’ll see ag exports increase in the next five years. And that strikes me as significant because if you look at the long-run perspective, the long-run history of U.S. agriculture. Growth and exports has been an engine of growth for the sector over a long period of time.
Michael Langemeier: Yeah, that’s definitely the case. I think this has gotta be contributing to the index being relatively flat here. It would be stronger. In other words, it would be stronger if more people thought exports were gonna grow. One of the things that we need to make sure we point out here, Is we have corn, soybean, wheat producers. That’s about two thirds of the survey. But we also have beef producers, they represent 15 to 20% of the survey. So we’re really looking at a lot of different commodities here. The one that we talk a lot about Jim, is the corn export’s been relatively weak, and that’s pretty important for this survey.
James Mintert: Yeah, this is just kind of interesting though, because it’s been such a long-term decline. And I say long-term, its over the course of about three years, we’ve seen a fairly steady decline. And it does suggest people’s perspective on the future is a little bit cloudy, I guess is a good way to say it. And we don’t have a lot of people in the survey telling us that they think we’re gonna see exports decline. Although this month that did rise to 18%. So, there was some increasing negativity there. And I guess I wonder, looking at this month’s numbers compared to, say, for example, last fall, Michael, if some of the negative rhetoric around China could be a motivation for why we’re seeing the numbers maybe get even weaker than they have been.
Michael Langemeier: Yeah, perhaps we need to have a question specifically related to that.
James Mintert: Yeah, good point.
[00:04:29] Farm Financials
James Mintert: The Farm Financial performance Index was down this month to a reading of 86. It was 93 last month. And in a way that kind of just puts it back to where it was last fall, I think in October the reading was 86. November was 91. We did see that bump back in December up to 109. But then here in January and February, we started asking people to compare their expectations for the 2023 year versus 2022, and all of a sudden we got back to the levels we were seeing last fall. I think it’s consistent with what we picked up and that Future Expectations Index. People are starting to worry about where these prices are headed and where net returns are headed, I guess more correctly.
We’ve been asking for a long time, what are your biggest concerns for your farming operation in the upcoming year? We started asking this question back in July. The results have been pretty consistent, but I detected a little shift this month, didn’t you?
Michael Langemeier: Yes, definitely. And we saw a decline in higher input costs. That’s still the leading concern at 38%, but that was as high as 45 and even 53% one of the months. And so that’s down a little bit from where it has been. Another item here that’s actually increased is lower crop and livestock prices. Continuing what we’ve been talking so far and so definitely an increase in that. In second place right now is rising interest costs at 24%. So that’s actually the second biggest concern, but certainly that lower crop and livestock prices is increasing. We’ll have to see if that continues to increase.
James Mintert: Yeah, we’re picking up a swap in the attitudes here. We had a period of time when people were more worried about availability of inputs than they were about what I would characterize as a very traditional concern in agriculture, which is lower crop and livestock prices. You know, if you go back to last summer, we had several months when more people choosing availability of inputs as their primary concern or biggest concern in the upcoming year, than we had choosing lower crop or livestock prices. This month that’s really changed. In fact, the percentage of people saying availability of inputs has really started to fall off. It was only 8% this month. And if you go back to last summer, we were running between 12 and 15% of the people in the survey choosing availability as their primary concern. And then this month, we had 18% choose lower crop or livestock prices. And that’s the second highest number we’ve gotten on that one. I think the first time we asked this question in July, we had 19%, but the subsequent months it was down between 11 and maybe 13% most of the time. So, we’re starting to pick up some change there. And as you pointed out rising interest rates is becoming more important. And I think on future surveys we’ll probably see even more people choose that. What do you think?
Michael Langemeier: I think that’s definitely the case.
[00:07:04] Farm Capital Investments
James Mintert: The Farm Capital Investment Index really didn’t do anything this month. It was up one point to a reading of 43 versus 42 last month. That leaves it essentially compared to a year earlier. I think a year earlier it was at 42. But the index is still way below where it was two years ago. Two years ago at this time that index was up at 88, which was essentially, I think maybe within one point of the all-time high for that index. So, we’re down about 50% compared to two years ago.
Michael Langemeier: I was just looking the other day at some USDA price indices. And we’ve seen some relief in some of the input categories. Fertilizer, for example, year to year is actually lower for anhydrous and potash, in particular. Phosphorous is very similar to what it was last year. And we’re also seeing some relief in some other items like fuel. Fuel, the increases are not quite as high as what they were. One of indices that continues to increase is machinery and buildings. I think that’s what we’re definitely picking up here in the survey. They’re expensive.
James Mintert: Yeah. We’re picking up that concern because, you know, the dichotomy here is for really two years now, or a little over two years, has been the fact that our Farm Capital Investment Index has been weak. And actually declining over time while sales of farm equipment for example, tractors, combines, continues to increase. Just looking at those numbers, I think it’s interesting to kind of look how that’s changed over time. At the peak of machinery sales during what we sometimes refer to as the golden era of about 2007 to 2013, sales of two-wheel drive tractors, a hundred horsepower and up, hit a little over 37,000 units. And then as farm returns, farm income levels really tightened in that roughly 2014 to about 2017 timeframe, those sales dropped sharply. They went from 37,000 to just over 17,000. So a drop of 20,000 units. But if you look since that time, the unit sales have been increasing and the biggest increases have been over these last two years.
You go back to the 2020 era, 18,720 hundred horsepower and up tractors sold. In ’21 it was 23,730, and in ’22 it was 26,533. At the same time that our index keeps telling us that this is a bad time to make large investments, people are stepping out and buying tractors, combines, other farm machinery.
Michael Langemeier: This is following current ratio or liquidity, is really what it’s following. Peak liquidity during that 2007 to 2013 period was 13. And then liquidity went down quite a bit from 14 to 19. Then it started increasing, particularly the last couple years. And so it’s a very similar graph, to what we’re seeing in terms of two wheel tractors are a hundred horsepower or over.
James Mintert: And then as you alluded to earlier, Michael, when we asked people who say it’s a bad time to make large investments, and that’s almost three quarters of the people in the survey, I think this month it was about 72% of the people in the survey said, it’s a bad time to make these large investments. 45% of them said it was because of the increase in prices for farm machinery and new construction. So the cost is making people say it’s not a good time, but that’s not the same as saying I won’t go out and make an investment. Right? That’s what’s going on here. Right?
Michael Langemeier: Yeah. Then the rising interest rates is also pretty important to that equation. We’ve seen that with cars and homes. Some deterioration in Japan those items because of rising interest rates. And and the other, we have an other category there. I’ve kind of looked at what people say, because they can write in their comments. Usually that’s all of the above. And so part of the other is really related to interest rates and prices too.
James Mintert: Yeah. And just looking at that interest rate question, our component back in July, which was the first time we asked this question, 14% of the people in the survey said rising interest rates were a reason why this was not a good time to make large investments. This month it was up to 27%. So that percentage is essentially doubled since last summer.
James Mintert: Short-term Farmland Value Expectation, which is of course is based on a question and ask people to look ahead to their expectations for farmland values over the next 12 months. That index really didn’t do anything this month. I think it was down a point to 119 versus 120 last month. That does leave that index down about 18% compared to a year ago, but I wanna emphasize as long as that index is above 100, that still means in the aggregate this group is still relatively optimistic. Meaning that in the aggregate, their viewpoint is farmland values are still likely to increase over the next 12 months. But they’re less optimistic than they were a year ago, and especially a little longer ago than that, we had that index topped out at just short of 160. So we’re down about 40 points or maybe 42 points compared to where the peak was.
The Long-term Index is down about five points compared to last month. It’s only down about 11% compared to a year ago. And that’s not too surprising. People have consistently been more optimistic when we ask ’em about looking at farmland values five years down the road. But you know, Michael, when you kinda look at the raw responses to that 12- month ahead question on farmland values, you can start to pick up a little change in sentiment.
Michael Langemeier: Yeah, definitely percentage that are indicating higher farmland values really has dropped 18 points. It was 51% in the beginning of last year, and 33% here in February. It has dropped rather significantly. At the same time, the percentage think we’ll have lower farm values has went from 6 to 14%. But I do think it’s important to emphasize even with the expected lower prices, lower U.S. net farm income, there’s still more people that farmland value is gonna increase both short-term and long-term. And so, we’re not looking at a situation necessarily like the situation from ’14 to ’19 where we saw some declines at farmland prices, at least right now.
James Mintert: Yeah. And of course this has taking place in an environment when most of the auction results that we hear about for farmland values are setting new records. To me, what our survey is starting to suggest is that the rate of increase is gonna slow down. Maybe not come to an end, but slow down. And if I had to forecast, or guess maybe is a better word, to when this might come to an end maybe we’re looking at perhaps next winter. Would you agree with that?
Michael Langemeier: Yes. I think ’23-’24, you’re probably looking at something that’s closer to the long run increase. If you look at the increase in land values from 1960 on, I just happened to be looking at that yesterday, it’s about 6%. And so maybe moving more towards that long run average rather than these double digit, above 20% in some states, in last couple of years.
James Mintert: Yeah. Long run average, or I might even be inclined to bet something a little less than the long run average. Yeah. Given that we’ve got a high base to start from.
Michael Langemeier: The real uncertainty there is whether it’s gonna be 6% or 3%, is really inflation. If inflation relatively high, then I would put my money on the 5-6%. If inflation comes down, then we’re probably looking at something that’s more flat.
James Mintert: That’s a good point. We continue to ask people about the main reason they expect farmland values to rise. So this question only goes to respondents who expect to see values rise over the next five years, and the top choice continues to be non-farm investor demand. This month that was chosen by 55% of those who expect to see farmland values rise. That’s a little lower than last month. Last month was 63%, but pretty consistent with prior months. I think prior months we were at 54 and 52. So there has been a little bit of a shift though. I mean, if you go back to the fall, we had kind of a drop off on people focused on that non-farm investor demand and more people thinking about inflation. This month it was still a mix of those two were the dominant characteristics, but a little bit of a shift there. What’s your take, Michael?
Michael Langemeier: This is really interesting cuz we always talk about the fundamentals, you know, the interest rates and strong farm cash flows and those really aren’t picked. We’re asking low interest rates right now, and interest rates are increasing, so you wouldn’t expect that very large, but strong cash flows it’s, what is it, 7%? It’s pretty low. .
James Mintert: Yeah. And I think it’s always hard to gauge how important the non-farm investors are. I was presenting at a meeting recently with one of the major auctioneers of farmland here in the Midwest, and their data suggested that at auctions. Now, this didn’t include the private treaty sales that take place, but at the auctions, I think they were looking at about 45% of the sales recently, going to non-farm investors and 55% to farmers. But one of the points that firm made in the presentation was the fact that when you think about non-farm investors, the vast majority of them are local people who have simply chosen to include farmland as a portion of their portfolio. I think a lot of times when people think about non-farm investors, they start thinking about big pension funds, et cetera. And that’s maybe not consistent with the data. The data would suggest it tends to be people that live perhaps either in that county or at least not too far away, and have chosen to augment their existing portfolio with farmland, either as a diversification strategy or in some cases maybe they simply prefer to invest in real estate versus for example, stocks and bonds.
Michael Langemeier: That’s not just in Indiana. I think that’s across the corn belt. I know in Nebraska where family farms, that’s very true in that region. If it’s a non-farm investor, it’s usually someone from Omaha or somebody that has a different occupation that’s looking to invest in something different than the S&P 500.
[00:16:24] Plans for Growth or Retire/Exit
James Mintert: Yeah, so Michael, this always is an interesting question every year since we really started the survey. So the very first opportunity we had was the winter of 2016. We’ve been asking a question once a year about what producers think a reasonable annual growth rate expectation is for their farm over the upcoming five years. And the answers to this question are always kind of interesting to me. Before we get into the results, let’s just talk about the buckets we give people to choose from. So the first bucket is no plans to grow in the upcoming five years. The second one is plan to exit or retire. The third is to grow less than 5% annually. The fourth bucket is grow at a rate of five to 10% annual. The fifth bucket is grow at a rate of 10 to 15% annually, and then finally the sixth bucket is to grow at a rate of more than 15% annually. And I guess, the surprising part, and we didn’t really know what this would show the first time we asked this Michael, but the surprising part has always been the relatively high percentage of people who say they have no plans to grow.
Michael Langemeier: Yeah. That’s been anywhere from 45 to 50%. It actually was right at around 50% this last month. That was surprising when we first did this but it’s been fairly consistent at 45 to 50% of the individuals that we survey, have either no plans to grow or plan to exit or retire.
James Mintert: Yeah. So you’re combining those two buckets, the no plans to grow and the plan to exit or retire. And the retirement part doesn’t surprise me too much. I think this month it was 16%. The lowest percentage we’ve ever gotten on that was back in ’17 and I think it was about eight or 9%. But the no plans to grow, who apparently don’t explicitly plan to retire. The fact that that hovers in that roughly 35 to maybe almost, not quite 40% range. That sort of surprises me a little bit.
Michael Langemeier: That’s a bit of a head scratcher. I did some follow up analysis looking at the sentiment for different buckets here or different categories and I divided these categories into three just so it make it a little easier to think about this. And I had planned to exit or retire. I had no plans to grow. And then I put all of the buckets related to growth in one category. And not to surprisingly, those that plan to grow are more optimistic. Barometer and the Index of Current Conditions.
James Mintert: Yeah, that’s not surprising, but it’s interesting that you’re able to confirm that. And so if you have a negative perception about what’s going on in agriculture, maybe that might be from an industry perspective, it also might just be reflecting what’s going on in your local community. Right? If, but if you have kind of a weak perception there, then the odds are that you’re going to either say no plans to grow or plan the exit or retire. Right?
Michael Langemeier: Definitely increased.
James Mintert: The other question that we’ve been asking periodically, we first posed this in I think June of ’21. Given the interest in solar leasing that’s taken place particularly here in the Eastern Corn Belt, we’ve been asking people what is the annual payment rate per acre you were offered to lease some of your farmland for the installation of a solar energy project to generate electricity. This question only goes to people who tell us previously that they are actively engaged in some discussions with companies about solar leasing. So, by definition, that’s a relatively small percentage of our total survey. Not everybody’s been doing this. I think Michael, over the last two months, we asked this question in January and again in February, I think in January and February combined, it was right around 10% of the people in the survey who said that they’ve had at least some discussion with the company about solar leasing. But we saw a change this month with respect to the rates that are being offered. If you look at the numbers, the percentage of people being offered a thousand dollars an acre or more, jumped from 34% last month, and really the prior surveys as well, up to 48%. So almost half the people who said they’d had some discussion said their rates were up above a thousand dollars. And Michael, I think that’s consistent with what we’ve been expecting to see these rates grow over time. But it was interesting that we got this just jump in one month.
Michael Langemeier: Yeah, that was very interesting. And, and two things really surprised me, not about this month, but just about this question in general over time. As you said, the rate the percent that are being offered, these higher rates is certainly increased. And anytime you roll out new contracts, that’s usually what you expect. The first offers are usually not as high as what they’re gonna eventually be. And then we start reaching an equilibrium. So, it’s interesting to ask, are we at an equilibrium now or it’s gonna take over a dollars in order for someone to enter one of these contracts. The other thing that’s really interesting is something you said before, 10% of the respondent said that they’ve talked to somebody. That seems like a really large number to me.
James Mintert: Yeah, it does and that’s one reason why we looked at it across two months, January and February, to kind of ensure that we didn’t get some kind of an aberration going on in the survey, but it was pretty consistent across those two months. We’re gonna continue to ask questions on this because it’s very interesting how this pretty dynamic market is shifting. And so it is maybe useful to think about what happened. There’s still a sizable percentage, I think roughly 24% said they were offered less than $500 an acre, which strikes us as being very low. The shift was in the percentage of people who said they were offered 500 to 750, and 750 to a thousand an acre. That group appears to have shifted over to saying that they were being offered over a thousand dollars an acre. So just for comparison in February, I think 12% of the people in the survey who said they were in some discussions, said they were offered 500 to $750 an acre. In January, that was 18%. The time before that, which was in November of ’21, it was 18%. The 750 to a $1,000 an acre category fell to 16% versus 23% in January. That number was also 23% in, November of ’21. So those two categories fell and appeared to have kind of shifted over to people being offered over a thousand dollars an acre.
And you kind of wonder, well, there’s lots to wonder about here I guess, but you kind of wonder if that those three groups are the people that are where some development might really take place. And for these developers to see some movement with respect to leasing, they finally concluded they need to bump up the rates to actually get the properties leased. We’ll continue to monitor this cuz this is a very fascinating development in agriculture and of course there’s lots of other details with respect to solar leasing in terms of some of the terms, et cetera. So we’ll probably have some more information on that going forward. We’re gonna continue to monitor that.
That wraps up the results for this month’s Ag Economy Barometer survey. You can get more details on our website, which is purdue.edu/agbarometer. There you can get the full report. That report includes a number of the charts that we’ve referenced. You can also download the slide deck that we used when we were discussing the results this month from the website. And you can also look at kind of a chart library that we have on that website, where we maintain a pretty comprehensive library of charts, including some things we didn’t talk about today. With that I’m gonna wrap it up and thank my colleague, Dr. Michael Langemeier for joining us today. And on behalf of the Purdue Center for Commercial Agriculture, I’m Jim Mintert. Thanks for joining us.
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