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Audio Transcript

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 esteemed colleague, Dr. Michael Langemeier, associate director of the Center.

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 15th through the 19th of May.

[00:00:39] Ag Economy Barometer Index + Current Conditions & Future Expectations

James Mintert: And Michael, the barometer dropped pretty hard. A month ago, the reading was 123. This month’s reading was 104. That’s down 19 points. That does leave the barometer five points higher than it was this time last year. But we are 54 points below two years ago. And you know, I think one thing that’s important to point out is how hard commodity prices, especially crop prices dropped from the time we did the survey in April to the time we did the survey in May.

And looking at those real quickly, if you look at Eastern Corn Belt, cash delivery bids for fall, I think corn was down over 50 cents a bushel. Soybeans, during that same time framed, declined over a dollar a bushel. And if you look at new crop, June/July delivery wheat bids here in the Eastern corn belt, those were down about 50 cents a bushel from mid-April to mid-May when we did the May survey.

So I think the negativity in the crop markets, in particular, probably had a pretty big impact on the barometer. What’s your take?

Michael Langemeier: I think that was definitely the case. And we have to remember here the crop is not very far along and so they’re forecasting trend yields. Certainly if it looks like we’re not going to hit trend yields, something below or above, we’re gonna see a movement in sentiment this summer.

James Mintert: It’ll be interesting to see, but this was one of those months where I think commodity prices, in this case, crop prices really did have an impact on the barometer.

If you look at the Current Condition Index and the Future Expectation Index, they were both down. The Index of Future Expectations was down the most, 22 points compared to last month. The Current Condition Index was down 13 points compared to last month. So that leaves current conditions at 116. That leaves future expectations at 98. And if you compare those to a year ago, the Future Expectation Index is actually a little bit lower than it was this time last year. I think three points below where it was this time last year. The Current Condition Index is still significantly higher than it was this time last year. That Current Condition Index, I think is up about 20 points compared to it was a year ago. So that contrast is kind of interesting, Michael, the fact that future expectations is just a little bit lower than a year ago, whereas current conditions is higher than a year ago. What’s your take?

Michael Langemeier: Yeah, I would expect these two to converge if prices do remain relatively low, you look into the fall.

James Mintert: Clearly people are feeling pretty negative about the future. Right. And again, I think a chunk of that is related to what took place with respect to crop prices, particularly those new crop bids and people starting to think about the impact that’s going to have on net returns.

It’s to some extent, this is the scenario we’ve been a little bit worried about for some time ever since. Input cost really took off the idea and the concern farmers have expressed in the past has been being trapped with these high input costs, these high breakeven levels in an environment where commodity prices weaken.

And, and it looks like that’s really showing up on our survey, don’t you think?

Michael Langemeier: Yeah. And certainly there would be more uncertainty if you look down the road compared to the current condition, because current condition, quite frankly, if you’re looking at crop production, a lot of those costs are known already, or they’re not gonna move all that much.

We pretty much know what those are going to be. But when you look down the road, you have that open question, just like you said, are input costs gonna stay at 2022-2023 levels? Are we gonna see decline in inputs? If we are, which inputs are gonna decline? It’s just that uncertainty creates a situation where the index of of future expectations is lower.

James Mintert: Yeah, I mean, I think the current condition index is really reflecting the fact that the bulk of the ’22 crop has been sold at some pretty good prices.

Michael Langemeier: Yes.

James Mintert: And so from that standpoint, current financial conditions are pretty strong,. But looking ahead, those returns don’t look so good. Right.

[00:04:15] The Farm Financial Performance

James Mintert: The Farm Financial Performance Index, no surprise, it was down the surprise was the fact that it was down as much as it was. It was down 17 points, I think compared to a month ago. This month’s reading was 76 versus 93 a month ago. And for our listeners, maybe a little reminder, last month’s Farm financial index was actually up a little bit compared to the prior couple of months. It was up, I think seven points last month compared to both March and February.

So the drop to 76 is I really the lowest since we started computing this index in January of ’21. It’s 50 points below where it was two years ago. So again, I think reflecting this negativity about what’s ahead of us looking to fall harvest, looking to 2024, what’s your take?

Michael Langemeier: Yeah. And if you look at ’22, if you look at the average profit margin in the University of Minnesota FINBIN database, it was 24%. There’s no way we’re gonna have a profit margin anywhere near you know, 24% in ’23. And so I think that index reflects that.

[00:05:13] The Farm Capital Investment Index & Farm Machinery and Construction

James Mintert: Yeah. Farm Capital Investment Index continues to be pretty negative. It was down six points to a reading of 37. That’s up fractionally compared to where it was a year ago. I think it’s up two points, but that’s probably not enough to say anything substantive about the movement in that index. The index is still way below where it was two years ago. It’s down 28 points compared to two years ago when the index stood at 65.

And of course, at that point it was still coming off its all time high back in late 2020, early 2021. So no big surprise given the negativity we saw in the Future Expectation Index and the overall barometer index that we would see the Farm Capital Investment Index go down. If you look at the folks that are telling us it’s a bad time to make large investments, which is about three-fourths of the people in the survey. We’re getting the same responses or at least pretty close.

Increase in prices for farm machinery and new construction continues to be one of the top. And this month it was actually the top choice in terms of why it’s a bad time to make large investments. Rising interest rates the last three months, it’s been average in about 33%. This month was 32, last month was 33.

Month before that was 34% of the respondents chose that as their top reason. So as I look at the data, Michael, I see a little bit of a trend with respect to fewer people are saying increase in prices is their top reason. First couple times we asked this question we had between 44 and 49% people said it was all about the cost, about the high prices.

Now we’re down into kind of the mid thirties. And the first time we asked this question back in the summer of ’22, I think only 14% of the people said they were worried about high interest rates or rising interest rates, and now we’re up to about a third. Sort of looks like we’ve stabilized there, or maybe those two are just kind of converging on each other.

Michael Langemeier: It’ll be interesting to watch this particular chart or this particular question as we move forward, because the increase in prices for farm machinery and new construction, I think the increases we’ve seen recently are smaller. Than what we saw in ’22 in particular. But they’re still in the same direction, meaning upward.

And so we’re not, we’re not taking anything out of those elevated prices that we’ve seen in the last few months, the last a year and a half or so. And I think that’s telling. I think people were thinking, well, prices are still relatively high. And that’s what they’re telling us there. I think the rising interest rates is going to be an important part of this question for quite a while.

James Mintert: Yeah, it’s not clear how many people have really felt the impact yet of rising interest rates. I suspect for a number of folks, the impact is more likely to be felt this fall as they start to tabulate their year end results and certainly early 2024.

Michael Langemeier: Definitely. And right now the current ratio of liquidity is very strong. And so we still probably have some people that are buying some machinery and grain bins for cash. You know, as that becomes less common, they’ll feel the big rise in interest rates that we’ve seen in the last year.

James Mintert: Yeah. That’s a good point. We’ve given the strong balance sheets that people are walking into this with. The impact of the rise in interest rates may be not as severe as maybe in some other periods of time that we’ve seen over the last four or five decades. Do you agree with that?

Michael Langemeier: Yes.

[00:08:24] Interest Rates

James Mintert: We continue to ask people what they expect to see happen with respect to the U.S. Prime interest rate, with the idea of course that so many ag loans are tied to prime interest rates. There’s been a little bit of a change as we started asking this question. The first time we posed it was in February.

In February, more people were expecting a larger increase in interest rates than what we’re seeing today. This month, I think, 32% said they thought interest rates would go one to 2% higher from where they are today. 27% said zero to 1%, and 22% said no change. If you compare that to the first time we posed this question back in February, you know, we had what, 75% of the people in the survey thought we would see interest rates head higher. This month it was 59%. So we’re seeing a little bit of moderation. To me, that’s still negative for sentiment, right? If you think interest rates are gonna continue to go up, that suggests that the squeeze on margins and profitability is gonna be more severe than otherwise.

Michael Langemeier: In particularly that one to 2% higher, there was 32% thought that the interest rates would be one to 2% higher. That would take us over 10%. And so that would definitely send a signal that we need to be a little bit more cautious when we’re buying assets. When you have an interest rate that’s that high. Certainly compared to where we were for a long period of time from about 2008 to 2020/2021, the interest rates are very low.

[00:09:47] Farmland

James Mintert: So farmland expectations shifted, especially in the short term question. So the short term question, of course, ask people what they think farmland values are gonna do in the next 12 months. That index was down 13 points compared to last month. So that’s a reading of 110 compared to 123 a month ago.

Compared to a year ago, that index was at 145. Two years ago it was at 157. As long as the index is above 100, that means more people think it values are going up than think they’re going down. But you can really see the change in sentiment when you think about where that index was a year ago and two years ago, and how much optimism we’ve really lost with respect to the short term movement in farmland values.

The long-term index was up three points compared to April but down four points compared to a year ago. I’d probably argue that’s really kind of a no change situation on that long term index. So no big change. And so no big surprise that people are more optimistic about the long run outlook for farmland than they are about the short run outlook. Were you surprised by the results on this one, Michael?

Michael Langemeier: Not really. I think the short-term index pretty much follows financial projections. And when that financial performance index was down as much as it was, it wasn’t real surprising to see that this one was down. The long-term index kind of has a life of its own, and as much less volatile than the short term index.

James Mintert: Yeah. The other point I guess I would make, Michael, is that maybe the surprise, looking at the data, was the fact that the short-term index was up last month. This month’s decline putting the index down to 110 actually puts it just a couple of three points below where it was two months ago.

So in some respects it was a modest change compared to two months ago, but the fact that it went up last month was sort of the aberration almost. And maybe, I know a month ago when we were doing this podcast, we were a little surprised to see the strength in the index.

Michael Langemeier: Yeah, the financial performance index was up a little bit last month compared to the month before too. And so, again, I think it tracks pretty closely that financial performance index.

James Mintert: So it’s interesting to look at the, not just the index for that short term index, but to look at the actual responses to the question. And of course, the question gives people three choices. They can choose higher farmland prices, lower farmland prices, or the middle value unchanged. And, you know, looking at a chart of this, you really see the trends start to unfold. The percentage of people who expect values to decline has been in an uptrend going back to early, late summer, early fall of 2021. It bottomed out, oh, at about three or 4%, saying they expected to see values decline. This month, that was up to 19%. That’s the highest value we’ve seen on that. Well, I think a couple of months ago we were maybe just one point higher than that. I think we were at 20%. But one of the highest readings we’ve ever gotten going back to certainly the beginning of 2020. And the percentage expecting higher farmland values declined 29%.

So putting that in perspective, that value, the percentage expecting farmland values to go higher, topped out at about 64 or 65% back in 2021. Now we’re down to just 29%. And you know, as I mentioned earlier, that percentage expecting values to go lower, bottom out at about three or 4%. So we’re looking at a change in people’s perspective.

It’s not enough to push that index below 100, but boy, it’s getting close and clearly you can see just this change in people’s viewpoint.

Michael Langemeier: Yeah, and the index hasn’t been below a hundred since the summer of 2020, so it’s been a long time. So since we’ve seen an index below 100. It’d be interesting to see in the next few months, if crop prices stay relatively low, whether that index does approach 100.

James Mintert: Yeah. Clearly the combination of weak crop returns, or at least the potential for weak crop returns, and rising interest rates should put some pressure on.

Michael Langemeier: That’s not a good combination.

James Mintert: Yeah. Asset values are going to suffer at some point.

[00:13:49] The Farm Bill

James Mintert: We’ve continued to ask some questions about the farm bill. That those discussions are taking place in Washington and probably gonna continue to take place for some time. So we’ve been asking people what do you think the likelihood of Congress passing a new farm bill in 2023 is? We’ve asked this now two months in a row. Been a little bit of a change. I think last month 40% of the producers said it was at least somewhat likely a new farm bill would be passed in 2023.

This month, that was down to 33%. So people are a little less optimistic that we’re gonna get a bill in place here in before the end of the year. And then we continue to ask people what the most important farm bill title is to them in a new farm bill. And not a huge change here. Crop insurance continues to be the top choice.

More people chose that this month than last month. This month, 48% of the people in the survey said crop insurance was the most important title for them in a new farm bill. And that was followed by the commodity program title that was chosen by 25%. That’s a little lower than last month. Last month that was a 31%. I was a little surprised by that. How about you?

Michael Langemeier: Yeah, I was a little surprised at that it went from 31% to 25% with the commodity program. We haven’t had very good payments the last two or three years, but historically that’s been a pretty good source, you know, source of funds for farmers and so that’s a little surprising.

James Mintert: Yeah. I think you’ve made a good point there with respect to, maybe it’s not top of mind because we haven’t had to rely on that as a part of the safety net in recent years. But clearly going forward, it could be an important consideration. Right?

Michael Langemeier: And certainly when you talk to farmers and you’re looking at an either or, in terms of safety net, they say crop insurance, that’s a really good safety net.

James Mintert: Yeah. I think our results continue to just support that idea with almost half the people in the survey saying that’s the most important aspect of the farm bill to them. We also added a new question this month. In a new farm bill, do you expect the PLC reference prices for corn or soybeans to be unchanged, increased, or reduced?

And a lot of talk early on with the rise in input cost and rise and breakevens, that there was perhaps a desire to push those reference prices higher. And it was interesting just to get the perspective from farmers about what they think is gonna happen. 45% say that they think the reference prices for both corn and beans will go higher in the new bill.

But that was balanced pretty close by about the same percentage saying they thought they’d be unchanged. I think on the soybean side, it was exactly the same, 45% On the corn side, it was 42%. I don’t know that I had a strong expectation with respect to how people would respond to this, but I may be a little surprised that we didn’t get more people saying that they thought it would go higher. What’s, what do you think?

Michael Langemeier: Yeah. I didn’t really know what to expect on this question, and certainly it’s kind of a moving target. Because if prices would’ve stayed higher, you know, as high as they were earlier this year, in my mind, and that would’ve kept input costs, you know, remaining at ’22 and ’23 levels. Then I would’ve said, well, maybe we’re gonna see an increase in PLC prices.

But the fact that prices came down, putting downward pressure on those input costs, makes me think that perhaps that unchanged is a somewhat likely scenario.

James Mintert: If you look at our results for these questions and over time now, and kind of an aggregate, it kind of suggests people are more worried about crop insurance than they are about the PLC reference prices, don’t you think?

Michael Langemeier: Yes, that’s definitely the case.

James Mintert: So in terms of negotiation, maybe the pressure is probably gonna come more from the standpoint of making sure crop insurance remains a strong component of the safety net and maybe a little less concerned about where these PLC prices are set.

Michael Langemeier: Yes, I did think that’s definitely the case. They would get much more nervous if they were changed in some of the crop insurance program than the reference prices.

James Mintert: Well, that wraps up our discussion for the May Ag Economy Barometer. You can get the full report with all the details on our website, which is purdue.edu/agbarometer. And of course you can also download the slide deck that Michael and I were looking at as we just made the discussion of this month’s survey. That’s available on our website which is purdue.edu/commercialag. So with that, thanks for joining us and on behalf of my colleague, Dr. Michael Langemeier and Purdue Center for Commercial Agriculture, I’m Jim Mintert.

Thanks for joining us.