May 2, 2023
Farmer sentiment improves; less pessimism over interest rates
Farmer sentiment improved modestly in April as the Purdue University-CME Group Ag Economy Barometer reversed a two-month decline up 6 points to a reading of 123. This month’s survey was conducted from April 10-14, 2023. The Ag Economy Barometer sentiment index is calculated each month from 400 U.S. agricultural producers’ responses to a telephone survey. Purdue ag economists James Mintert and Michael Langemeier share some insight into the results of the April 2023 Ag Economy Barometer survey on this episode of Purdue Commercial AgCast.
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 today, 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 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 perspectives on the ag economy. This month’s ag barometer survey was conducted from the 10th through the 14th of April.
And Michael, the Ag Economy Barometer actually rose six points this month. Rose to reading of 123. That’s up from 117 last month. Couple points higher than it was this time last year. Last year’s reading on April was 121. But that does still leave the index down about 55 points compared to where it was two years ago.
You know Michael, as I look at the barometer chart and thinking about the index, you go back over the last year, maybe about the last 14 or 15 months, it kind of looks like we’ve been in a trading range, with that upper end of that range being around 125. And the lower end of that range may be dipping just barely below 100. As I think about what’s going on in agriculture here in 2023, I don’t think it’s very likely that we’re gonna see that barometer go back to the readings we saw in late 2020 and early 2021, when index was actually above 175 for several months.
Michael Langemeier: Yeah, I agree. If you go back to early 21, it was a situation where we had relatively low input costs compared to today, but crop prices were very strong and so crop prices increased first, and then we got the increase in the input costs. Input costs are still relatively high today and we’re still looking at some pretty tight margins, particularly, looking at late ’23, selling crop in late ’23. I think we’re gonna stay where we’re at for a while.
James Mintert: I think it’s also important to remember, you know, the base period for the barometer is the tail end of 2015, in the beginning of 2016. And for our listeners that, you know, maybe you don’t remember that period all that well, that was a pretty tight situation, a pretty tight financial situation for a lot of farms. We were already past the peak in farm profitability that took place from that roughly 2007 to 2013 timeframe. And so, conditions were deteriorating during that timeframe. And if you look at the current barometer values, they are significantly stronger than what we saw in that late 2015, early 2016 period when the barometer over that six month span averaged 100. So I think maybe it’s important to remember that a little bit. That these index values are more positive during that timeframe.
You look at the two indices underneath the barometer, the Current Condition Index and the Future Expectation Index. They were both up a little bit this month. The Current Condition Index wasn’t up very much, just three points compared to last month. That does leave at about 7% higher than it was in April of ’22. Future Expectation Index up seven points compared to last month. That’s actually, I think, maybe 2% lower compared to April of ’22. But again, both of those indices were very strong in, the late 2020 beginning of 2021. And again, I don’t see either one of those going back to those kind of levels, here maybe the rest of this year. What do you think?
Michael Langemeier: We gotta be careful here because we may not have statistical difference between 120 for the future expectations and 129 for the Index of Current C onditions. But I think it’s kind of interesting that the Index of Current Conditions has been relatively higher than the Index of Future Expectations for the last three to five months. And what that tells me is I think producers realize that ’22 is a pretty good year and things might not be quite as good when you’re responding to a question looking five years out. I definitely think the more weakness in the Index of Future Expectations is about what I expected there to be.
James Mintert: Yeah, that’s an interesting point. In fact, if you look at the two indices, the the Current Condition Index and the Future Expectation Index, going back to late 2020, most of the time, not every month. We’ve had some differences when that wasn’t the case, but a majority of the time, the Index of Current Conditions was higher than the Index of Future Expectations. Which is interesting because that does suggest people realized that what was taking place, ’21 and ’22 was maybe a little bit of an aberration and that the future wouldn’t be quite that positive from a profitability standpoint. And that does differ from what we were seeing in that. 2018, 2019, 2020 era when future expectations was more positive than the Index of Current Conditions. So, that’s kind of an interesting point to think about with respect to where we’re headed going forward.
The Farm Financial Performance Index was up seven points this month to reading of 93. That’s up from 86 the last couple of months. Takes us back to where that index was in January. If you look at where we were this time last year, not a big difference, just a couple of points below where it was this time last year. What’s your take on the Financial Performance Index, Michael?
Michael Langemeier: This Farm Financial Performance Index is very closely related to the first question, that makes up the Ag Economy Barometer Index. And those tend to track one another. And so I think this particular index, really drove the increase that we saw in this last month. They were both up six or seven points.
James Mintert: Yeah. This question is kind of keyed off the idea of what your expectations are for your farm’s financial condition over the next 12 months. That’s an interesting level of optimism, isn’t it?
Michael Langemeier: Yeah.
James Mintert: So. The question we’ve been asking for the last several months now, I think the first time we asked this was in February. So we’ve asked it in February, March and April. Is what do you expect the U.S. prime interest rate to be one year from now? And over the course of that timeframe when we asked this question, of course the fed did change the current prime, by changing the federal funds rate, which induced a change in the prime rate. So, the prime went from 7.75. The first two times we asked this question to this most recent one, the prime was actually sitting at 8%. So underneath that, there’s a little bit of a difference in terms of what people were looking at or making a comparison. However, having said that, there is a shift going on here, at least appears to be that way. With respect to the responses we’re getting. What’s your take, Michael?
Michael Langemeier: I think there’s def definite shift there. In particular, the people that think the primary rate’s gonna increase 1-2%, went from 43% in February down to 37% in April. That’s a pretty large shift there. If I translate this to agriculture interest rates, you’re probably looking at an agriculture interest rate that tops out at something below 10%.
James Mintert: The other way I would just look at it is I think people are a little bit more optimistic about interest rates than they were the first time we asked the question. And of course, in the interim, we’ve had the banking situation take place. A lot of suggestions that the fed might not graze rates as aggressively as maybe what they had been planning prior to that taking place. And in the agricultural community, people are maybe viewing that as positive, and maybe that’s showing up in some of the other, responses we’re picking up. You don’t wanna read too much into one question, Michael, but, I detect a little bit of a shift in sentiment here. What do you think?
Michael Langemeier: When we’ve asked questions related to Federal Reserve policy, people point out is that being very important and that just tells us that there is a relationship between how they answer questions related to fed policy and sentiment.
James Mintert: And we’ll talk more about some interest rate responses a little bit later. Farm Capital Investment Index, at 43 was up one point compared to last month at seven points higher than it was this time last year. This time last year, that index was only at 36. And just for perspective, I think the low point in the index is right around 30, a couple of different times. So it’s up, certainly not the lowest we’ve ever seen, but still well below where it was two years ago. Two years ago at this time, that index was sitting at about 75. That index in late 2020, beginning of 2021, topped out above 90. And as we suggested with the Ag Economy Barometer itself. I don’t see this index going back to the levels we saw in late 2020, beginning of 2021. Do you?
Michael Langemeier: No, I do not. I think some of the things that they point to as being problems, related to investing in farm capital, are persisting. The fact that prices are relatively high for used and new machinery and higher interest rates. Both of those things put a damper on this index.
James Mintert: And, I think it’s important to point out that what we’re probably picking up, especially in the current environment with this Farm Capital Investment Index, is sentiment about whether or not it’s a good time to make an investment? Which isn’t always the same thing as will I actually make an investment? That’s probably been a little bit of a surprise to maybe both of us in terms of how the questions phrased and the responses we’re picking up. But you can see that when we ask people who tell us that it’s a bad time to make large investments in their farming operation, which is over 70% of the people in the survey are saying that .When we come back and ask them, why is it a bad time? You know, overwhelmingly the two things that are showing up are increase in prices for farm machinery/new construction. That’s been the top choice every single time we’ve asked this question. Going back to the summer of ’22, and then more recently, rising interest rates has really started to show up as a significant concern and maybe something holding people back in terms of thinking that now is a good time to make investments. First time we asked this question was in July of ’22, and only 14% of the people in the survey said rising interest rates was a primary reason why now is a bad time to make large investments. That has been drifting upward really ever since we started asking the question. This month that was chosen by 33%. Last month, 34% shows that. The month before that it was 27%. So you can kind of see how that’s been shifting over time. And if I had to guess Michael, that’s probably gonna continue to drift up over the rest of the year. What do you think?
Michael Langemeier: It certainly gonna stay in those low thirties. I can’t see it migrating below that, because you we’re really not expecting a decrease in interest rates anytime soon.
James Mintert: Yeah. And, I think as time goes on people are gonna be more cognizant of the impact. That’s what I think is gonna happen, but we’ll see how that shakes out. But clearly it’s starting to have an impact on people’s decision making process. So far, it doesn’t look like it’s had an impact on sales. When you look at sales of farm machinery, inventories are still pretty tight. Order books are still pretty strong, so it could be a while before it starts to impact sales, but it’s starting to show up as a concern.
Of course, we ask people about their farmland value expectations every month. We ask it two ways. One’s focused on the short term, looking ahead just 12 months. And the other is focused on more of an intermediate term. We call it long term, but it’s probably more intermediate cuz it asks the people to look ahead five years. And the Short Term Index kind of jumped a little bit this month to a reading of 123. That’s up 10 points compared to last month. Still lower than we were last year at this time. The index a year ago was at 144 and of course the peak in that index I think was about 159. That goes back to the beginning of 2021 or early 2021. What’s your take, Michael?
Michael Langemeier: I was surprised at this one. Of all the questions that we summarized this month, this one probably was one of the most surprising results. Cause that’s a pretty large increase and I just don’t see the fundamentals changing all that much and certainly not getting better. And so, it’s a kind of a head scratcher to me, what’s going on?
James Mintert: That’s a good way to put it. When I looked at it, the first thing that came to mind was farmers may be changing expectations with respect to interest rates and maybe thinking we weren’t gonna get as much negative impact out of rising interest rates. Truthfully in our survey, that was about the only thing I could pick up in terms of an explanatory variable.
Michael Langemeier: And the Farm Financial Index was up, but that’s a pretty short term measure and so maybe that helped a little bit too.
James Mintert: Yeah, maybe those two things came together.
The long-term index was unchanged compared to last month. It was up one point compared to a year ago. And again, that long-term index is kind of flattened out, in the reading range of about 140 to 142. I think this month’s index was 142. Same as last month. Year ago ,it was 141. If you look at the chart, it’s just kind of bouncing around in that vicinity of about 140 to maybe 145. This one was more consistent with what I expected. I didn’t expect to see a change in the Long Term Farmland Value Expectation Index, and that’s kind of what we got.
Michael Langemeier: Yeah, and they’re still quite bullish when it comes to long-term farmland values.
James Mintert: Yeah. Coming back to the short term index, it was interesting to look at the underlying responses to the question cause there’s really three ways people can answer the question. One is thiey say they expect to see higher farmland values. The other is to say lower farmland values. And then there’s the neutral category. And the shift was interesting. The shift was mostly about the fact that fewer people said they expect to see lower farmland values in the next year. For perspective, a month ago, 20% of the people in the survey said they expected to see farmland values decline in the next 12 months. This month, only 14% of the people in the survey chose that. Some of them shifted apparently, from the negative category perhaps over to the positive category. That rose from 33% last month to 37% this month. So we saw a little bit of shift there, but the biggest shift was clearly a loss in the negative perspective. Do you agree with that?
Michael Langemeier: Yes. And the 14%, just put that in perspective, that’s still relatively high compared to what we saw from approximately late 2020 all the way through late ’22. And so there’s about a two year period there where the percentage that thought that land values were gonna drop was less than 10%. And so we’re still above 10%, but it’s still a relatively small number compared to those that think land values are gonna continue to increase.
James Mintert: Yeah, and if you look at the chart, that percentage of producers who expected lower farmland values bottomed out in late 2021 at less than 5%. And then if you look at that chart, it was kind of a steady uptick from roughly the late 2021 up through last month. As we kind of gradually rose up to that 20% expecting a decline in values over the next 12 months. So, interesting to see that kind of a shift. It’s really gonna be interesting to see what happens here the next couple months, how that evolves going forward.
So we took a chance this month to maybe ask some interesting questions that are affecting agriculture to see what people think. And one of them was, what do you think the likelihood of Congress passing a new farm bill in 2023 is? And we had no idea what people are gonna say to this. And not surprisingly, the most common response was they were uncertain. But if you look at it, the largest group says that they think it’s at least somewhat likely that we would see a farm bill passed. 40% said that is either somewhat likely or very likely that we’d see a farm bill passed.
Michael Langemeier: Yeah. I’m a little bit less optimistic when it comes to this question. I think I would’ve been uncertain or somewhat unlikely.
James Mintert: Yeah, I think on the very unlikely and somewhat unlikely category, add those two together, that was at 29%. Versus on the upside the more optimistic people thought it passing, that was at roughly at 40%.
Michael Langemeier: And I guess it really depends on how big a changes they make to the farm bill. If it’s not changed that much, perhaps it can move faster.
James Mintert: It seems like as we’re seeing more discussions take place, one of the headline stories this week was about some of the ag groups not necessarily agreeing with each other, which doesn’t bode well for passage of a bill, does it?
Michael Langemeier: No. That doesn’t.
James Mintert: We followed up and said, thinking about a new farm bill, what is the most important title of the farm bill for you within the bill? I think the choices, of course, were the commodity program title, the crop insurance title, the energy title. We called that the renewable energy title, but it’s really called the energy title. The conservation title, and then research and extension funding. And no surprise, Michael, which one came in number one, right?
Michael Langemeier: Yeah. Crop insurance was number one followed by commodity program. That’s not surprising at all that those two are ranked really high.
James Mintert: Conservation funding came in a little higher than the energy title, and I wasn’t sure about that one. Given what’s going on with renewable energy, concerns about ethanol, interest in renewable diesel. I wasn’t really sure how that would shake out, but we did get 13% choosing conservation as being more important than the 8 % that chose the energy title. Maybe that’s because it’s more of a micro impact, right? The conservation title has direct impacts individually on farms, whereas the energy title is more of a macro perspective. What do you think?
Michael Langemeier: I think they’re thinking about will there be some kind of incentives to encourage things that’ll reduce carbon, specifically tillage or cover crops or both? I think that perhaps is what they’re thinking about.
James Mintert: That’s an interesting point. So in that sense, maybe some spillover from the energy concerns into the conservation side.
Michael Langemeier: Definitely correlated.
James Mintert: Research and extension funding got an 8% vote from folks. And lots of discussions, particularly recently about the need to increase research funding to maybe improve long-term productivity in the ag sector. So that was kind of interesting that it came up about the same as the renewable energy vote, which I wasn’t sure that would be the case either.
Then we continue to follow up on what’s going on in the solar leasing arena. Lots of interest, especially here in the corn belt with respect to what’s taken place on solar leasing. The question we really focused on was what are the annual payment rates being offered on a per acre basis to lease farmland for the installation of solar energy? And this is after the development, and after the construction periods. In other words, these would be the annual long-term payments being made. We did revise the responses a little bit, so we gave people an additional category this month. And that was an upper end of lease rates because that’s some of the anecdotal evidence we’ve been picking up. And sure enough, it does look like we’re seeing a shift here to more people saying that they were offered some relatively high lease rates. 22% said they were offered a lease rate of a $1000 to $1250 per acre. 25% said they were offered or at least discussed with a company a lease rate of $1250 per acre or more.
Michael Langemeier: What still surprises me about this question though is we got close to a third that are less than $500. We talked about this last time, I wonder if there’s something going on geographically that it’s not possible for us to pick up.
James Mintert: Yeah, that’s a good point. So just for the listeners so you know what the categories are, the first category was a lease rate of less than $500 per acre. Second category was $500 up to $750 per acre. Third category was $750 up to a $1000. And then the fourth and fifth categories are the ones we’ve already talked about a $1000 to $1250 and $1250 or more. Compared to prior months, the percentage of people choosing 500 to 750, and 750 to a 1000 declined, and it implies that perhaps those percentages or those folks that were offered those kinda lease rates may be shifted over into these higher rates. But you’re right, that less than 500 category continues to hang in there at 32%. And I guess the other slight modification we made to the question this month, Michael, was we put a qualifier in here and said, in the last six months. Because one of the hypotheses that you and I had was maybe we were picking up some lease rates that were offered a long time ago, at the very beginning of the solar leasing. And maybe that’s why some of those lease rates were as low as they were. But despite that less than six months qualifier, meaning we’re asking people to report on lease rates that were offered in the last six months, we still picked up roughly one third of the people in the survey saying less than 500. That suggests we’re picking up some lease rate offers that are outside, for example, the Eastern Corn Belt. Do you agree with that?
Michael Langemeier: Yes. I think that’s what has to be going on. That’s what I was hinting at. Perhaps in the Great Plains, you know, where the cash rental rates are much lower. We’re picking up some lower solar rates out there.
James Mintert: Yeah, because we’re not picking up any of that. When we have discussions here in the Eastern Corn Belt, we are not talking to any farmers that are saying that they’ve been offered less than 500 recently. I did pick up some of that a couple of years ago, but not recently.
Well that kind of wraps up our summary of this month’s Ag Economy Barometer survey. You can get all the details including the complete report and the charts, et cetera, at our website, which is purdue.edu/agbarometer. You can always subscribe to the podcast if you’re listening to this on the website or you can subscribe by any of the major podcast providers and also at our website, which is purdue.edu/commercialag. And so on behalf of my colleague, Dr. Michael Langemeier and the Center for Commercial Agriculture, I’m Jim Mintert. Thanks for listening.