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Audio Transcript

James Mintert: Welcome to Purdue Commercial AgCast at 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 June 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 12th through the 16th of June.

[00:00:39] June 2023 Ag Economy Barometer Overview

James Mintert: The Ag Economy Barometer Index Rose 17 points compared to last month. That was a big jump. So we went from 104 up to 121. That’s 24 points higher than a year ago. And I think 16 points below, where it was two years ago. Two years ago, the index stood at 137. And of course the all time high for the index is up around 180.

I don’t remember exactly, but back in 2020, we got up above 175 for a couple of months. So big improvement compared to last month. Still well below a couple years ago, still well below the all time highs. I expected to see the barometer maybe improved this month, but I did not really think we’d see a 17 point rise. What’d you think?

Michael Langemeier: That was larger than I thought too, I mean, obviously they were taking a look at those strengthen the futures prices from May to June. And I think it’s also important to point out that the prospects for beef production look pretty good. And we have to remember that that is a fairly sizable proportion of the people responding to this survey.

James Mintert: Yeah, that’s a good point. On the livestock side, and we did see some improvement in people’s perspective on livestock profitability in the upcoming five years versus crop profitability. And I think a lot of that had to be coming outta the beef side. Certainly not outta the hog side. And as you point out, I think roughly 19% of the producers in our survey each month have a beef enterprise, and a big chunk of those are probably cow-calf operations as opposed to cattle feeders.

And if you look at, underneath the hood on that barometer index, look at the Index of Current Conditions and the Index of Future Expectations. All of the improvement came out of people’s improved perception about what the future’s gonna look like. The future Expectation Index was up 25 points compared to last month.

That’s 27 points higher compared to June of 2022. On the flip side, the Current Condition Index was unchanged compared to last month, and it was still higher than last year. But the key point I think, is that no change compared to last month. So all of the month to month improvement really came out of people’s improved perception about what’s gonna happen in the future, which is kind of interesting.

Michael Langemeier: Very interesting and quite surprising frankly, when you expect a, a rather large increase in the index, it usually pulls up both the current conditions index and future expectations, but not this month. As you indicated, all the increases in the Future Expectations Index. And it makes you wonder what they think the long run crop price really is.

James Mintert: Yeah, that’s a good point. And of course we were seeing some fluctuation in commodity prices as the survey was being conducted. Commodity prices for the major commodities like corn and soybeans bottomed out in late May, and then were improving as we went through June because of the perception that we were having a lot of trouble with respect to dought in a big chunk of the corn belt and even outside the corn belt. So that was giving us a rise in prices. The part that was maybe a little bit surprising to me was this, I think it’s a little hard for a lot of people to get too optimistic when they look out the window and they see their crops withering.

And that was really what was kind of going on. And crop conditions were deteriorating and that was leaving to an improvement in prices. But kind of surprising and, and interesting to look at the actual question we used with respect to future expectations or one of the questions. Do you think that a year from now your farm operation will be better off financially, worse off, or about the same as now?

And that’s a question we ask every month cuz it’s part of the base barometer index. And this month there was a seven point rise in the percentage expecting things to get better. So that went from 13% last month to 20% of the people in the survey here in on the June survey. And on the flip side 12 point decline in the percentage that expect things to get worse over the next year.

So the bigger shift there was in the percentage of people expecting things to get worse. Right. And that was I don’t know. I was, it was a little interesting to look at those results. It’s a pretty big swing on a one month basis. We have seen swings that big before, but still it was a little surprising that they happened this month.

Michael Langemeier: This is always surprising to me, but I always think in terms of accural net farm income, and I don’t think a lot of farmers do. If you look at accrual net farm income, the fact that we sold corn and soybeans in particular for really good prices in early ’23. Obviously it was the ’22 crop makes ’23 net farm income appear like it’s gonna be stronger than ’24. So it’s kind of hard to figure out exactly what they were thinking when they were answering this question.

James Mintert: Yeah, the optimism there is well, we’ve got some other questions that you can, you can kind of pick up the optimism, but it’s a little hard to discern exactly what was driving the improvement in optimism about the future.

No big surprise then that the Farm Financial Performance Index went up. It went to 86 versus 76. That’s a 10 point improvement. The index was three points higher than a year ago, but still, I think 10 points below where it was two years ago. A little surprising that the Farm Financial Performance Index was up 10 points given that the Current Condition Index didn’t change at all.

Michael Langemeier: Yeah, these, those usually track much closer with one another than they did this month.

James Mintert: Again, I think it’s probably people doing exactly what you were talking about, Michael, thinking about net farm income on a taxable basis here for 2023 and looking relatively strong based on a lot of sales from the ’22 crop. But why that didn’t correlate a little higher with that Current Condition Index is maybe a little bit of a surprise.

Farm Capital Investment Index rose, I think it was a reading of 42 this month that was five points higher than a month ago, and I think seven points higher than a year ago. Still leaves that index about 12 points below where it was two years ago.

Over 70% of the producers in the survey think it’s a bad time to make investments. When we ask those people, that particular group, why they think it’s a bad time. They continue to point to two things, rising interest rates and the increase in prices for farm machinery/ new construction.

You combine those two over 70% of the people who think it’s a bad time, it says it’s because of at least one of those two reasons. Probably no big surprise there. We just don’t seem to get much movement in, in this. We’ve done some other work looking at maybe decomposing the barometer responses and kinda gets into this idea of, of who we’re talking to and their position in the industry and whether or not they have an opportunity to perhaps expand or view it as, as difficult to expand. Do you kind of agree with that, Michael?

Michael Langemeier: It’s difficult to disentangle exactly what’s going on in people’s mind when we come up with a farm investment index. And in particular that, that question that’s related to the Farm Capital Investment Index. But this one here has been kind of interesting to watch because it does appear, if you go back a year, that that increase in prices for farm machinery, it’s a lower response rate today than it was a year ago. And so it makes me wonder what that particular response is going to be 3-6 months from now if we have tight margins.

James Mintert: The other thing that’s obviously as, as you look at this question, we started asking it in July of ’22. A pretty big change with respect to people choosing rising interest rates as a concern here, right? First couple times we asked this question, I think between 14 and 18% of the people in the survey said that rising interest rates were a concern with respect to making investments. This month it was 35% chose that. Last month it was 32. The month before that it was 33. So there’s been a pretty big change just since last summer. So interest rates are getting people’s attention and they do think it is maybe a negative with respect to making an investment. So I guess that’s, that’s consistent with asset theory, right, Michael?

Michael Langemeier: Yeah.

James Mintert: Sometimes we wonder about that, but that’s, that’s pretty consistent.

We’ve been asking now here for I think, what, five months in a row, what people expect to see happen with respect to the U.S. prime interest rate. And of course, so many ag loans are tied to prime interest rates. That gives people a pretty good baseline with respect to thinking about this question.

And there’s been a change over time. I think this month over 40% of the producers say that they’re looking for either a decline or no change in interest rates over the course of the next year. On the flip side you know, we’ve got what, 28% of the people in the, in the survey say they think rates will be one to 2% higher a year from now.

29% said zero to 1% higher. The part that surprises me is that 40% who think either no change or decline, they’ve got a little different perspective on interest rates maybe than than I do, and maybe you do as well. But

Michael Langemeier: Yeah, there’s almost one quarter of the people think that it, interest rates are gonna be zero to 1% lower, or even one to 2% lower. If you combine those two categories, that response really surprises me cuz I see very little indication, at least for the next year that interest rates are gonna go down.

James Mintert: Yeah, they’re either a lot more optimistic about what’s taken place with respect to inflation. Or they think the Fed is gonna get concerned about maybe a downturn in the economy and start to loosen rates a little bit.

Michael Langemeier: It’s obviously there’s a lot of mixed messages out there and, and people are interpreting the messages differently.

[00:09:16] Farmland Values

James Mintert: Short-term Farmland Value Expectation Index rose sharply this month. It was 110 a month ago. This month it was 126, a 16 point improvement. That leaves the index 10 points lower than last month. But you know, when you look at it on the chart, that’s a jump right from 110 to 126. And admittedly people became more optimistic about the future as that Future Expectation Index indicated, but still as a pretty big jump for, for a one month swing. And again, if you look at the responses to the question we use for that index, which is asking people about their farmland price expectations, 12 months ahead. You can see the shift.

In May 29% of the people in the survey said that they expected to see higher farmland prices in the next 12 months. This month it was 38%. Last month, 19% said they expected to see lower farmland values in the next 12 months. That dipped to 12% this month. And I guess, the swing there just really surprised me. I’m not shocked that it, given what we saw in the current condition index that we saw an improvement, but the big swing is kind of surprising.

Michael Langemeier: This is a large change, you know, given no change in the current conditions index. And you know, as we, as we’ve been saying this, this is a bit of a surprise. And, and, and moreover, this index Index is the strongest it’s been all this year. I think the December index was similar to this month’s index, but, but this is the strongest it’s been all year.

James Mintert: Yeah, that’s that’s a good point. If we go back and, yeah. Look early in the year, you’re right. So it kind of undoes the downturn that we were looking at here over the course of late winter and spring months.

And it’s gonna be interesting to see what happens in the July survey because, commodity prices, corn to soybean prices in particular, were relatively strong when we were doing this June survey. They’ve weakened sharply as we record this, and so it’d be interesting to see what happens to commodity prices for the week that we collect data in July and what influence that has on people’s perspectives.

Equally surprising to me was the improvement in Long-term Farmland Value Index that rose six points to 151 up from 145 last month. And the interesting thing about that to me is that leaves that index higher than it was this time last year. This time last year it stood at 141, so we’re 10 points higher than a year ago.

And you know, the all time high in that index is right around 160 or 161, so we’re not too far below the all time high. Again a pretty big change, especially these last two months cuz last month was up as well. So the long term index now is up two months in a row. A fairly big swing in that long term index based on maybe not a whole lot of new information. Right?

Michael Langemeier: That’s, that’s what I think.

[00:12:01] Cash Rental Rates

James Mintert: This was the first month that we asked people about their expectations for cash rental rates in 2024. So this question only went to corn soybean producers. So we’re looking at essentially kind of a corn belt cash rental rate perspective.

One out of four 25% of the people in the survey of corn soybean producers in the survey. Expect an increase in cash rental rates 2024. 68% said about the same, but 25%, one out of four, I think rates are going higher. Again, we surveyed during a timeframe when commodity prices were strengthening as opposed to weakening.

Coming in, I thought we’d see, well we always get a distribution, so I knew some people were gonna choose higher. I didn’t expect it to be that much different than the percentage choosing lower. For completeness, 7% in this survey said they thought cash flow rates were headed lower in 2024. I thought there’d be a little more balance between the percentage choosing higher and the percentage choosing lower than, than what we wound up with.

Michael Langemeier: I did too. And this is a question that we’re gonna repeat here at least for one more month, perhaps for two more months, and we’ll see if those don’t balance each other out. But even if you look at the largest response by far was about the same. That would be a big change from what we saw in ’21 and ’22, where we saw some relatively high increases.

And so that’s another way to think about this question. But the 25% surprises me as they expect rent to be higher. Because if you think about a budget and, and the costs that you can possibly decrease is negotiating cash rents would be ranked way up there, as a cost that you perhaps can try to reduce in the next year. That doesn’t bear out in this chart.

James Mintert: Yeah. This is an interesting topic. I guess you’ve done a lot of research on this over the years, looking at what drives change in cash rental rates and you know, you might kind of update us on that, Michael, but you basically have concluded there’s a lag, right?

Michael Langemeier: Yes, there’s a lag. First of all, they’re very sticky. They don’t tend to move near as much as net returns. And so that’s a very important point. But typically there’s a year lag. And so if margins are tight in ’23, you’d expect that to enter into the negotiations for ’24. And that’s why I’m saying that that 25% that think that cash rent’s gonna be higher, they’re, they’re thinking that net returns are gonna be a little bit different than what we’re thinking. And perhaps we’re thinking that net returns aren’t gonna be that bad in ’23.

James Mintert: Yeah. It gets back to what you said at the outset, which is do per producers look at it on an accrual basis or they look at it more at taxable income?

Michael Langemeier: Yeah. And then I suppose maybe liquidity goes in there. We’re coming into, we have a lot of liquidity there, and if you don’t wanna lose, you know, you can lose ground even in trying to negotiate too hard for reduction in cash rent. And so this is complicated you know, this negotiation process related to cash rent.

James Mintert: Yeah, I think liquidity is a good point. I, I think people that are in a strong financial position are probably a lot more concerned about losing farmland, and we’ve talked about this a lot over the years. The idea is that if you lose farmland today, you’re not likely to get it back in the future.

Michael Langemeier: And so sometimes it takes two years in a row of relatively low margins coming off a couple good years to really see a decline in that cash rent.

James Mintert: So it is gonna be interesting to see us repeat this question, I think the next couple of months because we know a lot of those cash rental rate negotiations will be taking place here over the course of the summer and maybe spilling over into the early fall period. These results suggest there’s gonna be pressure to not reduce rates. Right?

Michael Langemeier: Yeah.

James Mintert: Definitely. I I think we could be pretty comfortable on that one.

[00:15:29] Farm Bill & Ag Policy

James Mintert: A new question this month was we asked people several things about the Farm Bill, but the one that was new this month was, what do you think the likelihood is of Congress overturning California’s proposition 12 as part of a new farm bill. And of course, proposition 12 was the proposition that California passed that mandates the housing requirements for hogs that are gonna be sold as pork in California. Producers were split on whether or not Congress was likely to overturn proposition 12 in a, in a new farm bill. 36% thought it, at least somewhat unlikely, 25% thought it was at least somewhat likely.

You could probably argue that maybe people were flipping a coin on this a little bit, but You know, on the extreme side, very likely was 8% and very unlikely was 17%. It, it kind of suggests though that there is gonna be some pressure from producers, certainly some interest on the behalf part of producers, to see Congress take some action on proposition 12.

Michael Langemeier: Yeah, I think that’s a very, very good point. I personally think that 25% that said very likely or somewhat likely are a little bit overly optimistic with the chance of this happening. But, but who knows?

James Mintert: Yeah. And of course, this happened after we did the survey. California’s backed off a little bit with respect to the timing. They’ve pushed back with respect to essentially give retailers and wholesalers an opportunity to clean out inventories. So they’ve pushed back, I think, enforcement to the end of this year, but still serious concern on behalf of the, the pork industry. So it’ll be interesting to see. We’ll probably repeat this, maybe, particularly if this discussion looks like it’s got some legs. We’ll repeat this question in the future and see how that pans out.

So that wraps up the highlights for this month’s Purdue/ CME Group Ag Economy Barometer. You can get the full report at our website, purdue.edu/agbarometer.

And I wanna highlight the fact that we’ve got the Purdue Farm Management tour coming up on July 11th. So if you’re anywhere close to Indiana on July 11th, we’d encourage you to tap into the Purdue Farm Management Tour. It’ll be in southern Indiana this year in Washington and Jackson County, south of Indianapolis. So check that out. More details for that are available on our website, purdue.edu/commercialag.

On behalf of my colleague Michael Langemeier and the Purdue Center for Commercial Agriculture, I’m Jim Mintert. Thanks for joining us.