Audio Transcript:

Brady Brewer: Jump into the latest USDA farm income forecast that was just released. If you haven’t seen the latest numbers released at the end of August, net farm income is at 141.3 billion dollars and net cash farm income is at 148.6 billion dollars. Michael, does this surprise you in terms of a net farm income actually got adjusted upward while net cash farm income got adjusted downward from February to August?

Michael Langemeier: It does, until you start digging into the details a little bit.

Brady Brewer: Hi, and welcome to the Purdue Commercial AgCast, the Purdue University Center for Commercial Agriculture’s podcast featuring farm management news and information. I’m your host, Brady Brewer and joining me is Dr. Michael Langemeier, professor of agricultural economics and associate director for the Center for Commercial Agriculture at Purdue University.

On today’s episode, we will be discussing the latest USDA farm income forecast that was just released in August of 2023. Before we get to the forecast, I just want to remind everyone that for further farm management news and information, you can go to our website, which is purdue.edu/commercialag, or you can find us on Twitter with the handle at PUCommercialAg.

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[00:01:20] USDA August 2023 Farm Income Forecast

Brady Brewer: I want to jump into the forecast. If you haven’t seen the latest numbers USDA released at the end of August. Net farm income is at 141.3 billion dollars and net cash farm income, which includes off farm income, government receipts and stuff that’s not directly tied to farm income, which is always a little bit higher, at 148.6 billion dollars. Now, if you compare this to what we saw at the February forecast, so maybe I should back up here real quick and say the USDA releases forecast throughout the year for the growing season. So obviously as we get through the calendar year, they adjust the numbers relative to new information that’s coming in. The February forecast for 2023, obviously, that’s at the beginning of the calendar year, there’s a lot that could change between February and August. In February, they were projecting net farm income to be 136.9. So actually a little bit lower than the most recent numbers and net cash farm income, which again, includes government receipts off farm income, was a little bit higher than the August numbers at 150.6 billion dollars. Michael, I kind of want to pitch it to you. Does this surprise you in terms of a net farm income actually got adjusted upward while net cash farm income got adjusted downward from February to August?

Michael Langemeier: It does, until you start digging into the details a little bit. And I know you’ve done this, Brady, but we have to remember here, this is all commodities in the U.S. A lot of times in the Center, we like to talk about corn and soybeans, and I think it’s obvious that the receipts for corn and soybeans are going to be lower in ’23 compared to ’22. And certainly the prices are going to be quite a bit lower this fall than they were last fall. And so that, that’s pretty obvious, but there’s a lot more to these estimates than just corn and soybeans. You have wheat, cotton, rice, vegetables, cow-calf operations. You’ve dug into those numbers a little bit. What did you find?

Brady Brewer: Yeah. So you’re exactly right. There’s a lot to these numbers. So starting off, the reason I wanted to talk about this was if you’re someone here in Indiana and you saw that USDA just revised upward the estimate of net farm income for 2023 and you’re sitting there going, wait, what are they looking at? Well, what they’re looking at is a whole lot more than just here in the Midwest. Now I know, Michael, you and Jim, in the Center for Commercial Agriculture, have looked into this and you guys weight the barometer accordingly, you know, corn and soybeans do make up a large portion of U.S. farm receipts. Corn and soybeans are a significant portion.

Michael Langemeier: They’re at least 50%, and if you look at, if you add wheat to that, that gets you about 65%. But, but beef depending on how you count that exactly, whether you include cattle finishing in there, if you include all of it, it’s 15 to 20%. And you know, obviously maybe it’s not obvious, but those that are in this industry know that the receipts are pretty good right now.

Brady Brewer: Yeah, absolutely. So while it’s more than 50 percent or 60%, depending on what commodities you include, it’s not 100%. So there is more going on that could be explaining these numbers. So let’s dig into some of these cash receipts that we’re talking about. So if we look at the numbers and here we’re comparing each of these to the previous year.

So 2022, relative to what’s forecasted here through the end of 2021. So corn is down, it is looking a little right around $80 billion in corn. This is down from right around 86 in 2022. Soybeans is down from 2022 as well. Fruits and nut is remaining somewhat steady from 2022 to 2023. Vegetables and melons is one of the big gainers here and even from the February forecast, August 2023 is up as well. Wheat is remaining steady as well as cotton. On the livestock side, the cattle and calves is a huge winner relative to 2022. It’s increasing in its cash receipts over the past year. Dairy products is down from 2022. Same as broilers and hogs, though hogs is a fairly nominal decrease over the past year.

When we want to look at the February revision to august revision of the USDA farm income forecast. What we see is corn receipts are down about 7%. And I would say this is probably why, you know, we mentioned that if you’re here in the Midwest, you may be looking at the latest revision of USDA numbers and saying, Wait, what are they looking at? I would say the 7 percent revision, so 86 billion down to 80 billion in cash receipts from February to August, I think that’s pretty indicative of maybe what the farmers here in the "I" states or the Midwest corn growing states are probably thinking about seven percent.

Michael Langemeier: And again, when we’re looking at these numbers, it’s not down from last year. It’s down from the February estimate.

Brady Brewer: Yes.

Michael Langemeier: And to do these February estimate they were looking at WASDE forecast and if you go back to the early WASDE reports in ’23, they were expecting fairly low corn and soybean prices this fall. And so what this tells us is just that their forecasted prices for later this fall are just lower. They’re substantially lower from ’22 but we’re not comparing ’22, we’re comparing February ’23. Just keep that mind in our discussion here.

Brady Brewer: Yeah, just to reiterate, because we have kind of jumped back and forth between talking about comparing to February 2023 to August and comparing August to last year at this time. So August of 2022. This is earlier this year, February, what the USDA was expecting at the beginning of the growing season relative to now here at the end of the growing season.

Now we will get a little bit more, Michael, here into comparing it to last year this time because overall net farm income obviously has decreased from 2022 levels over 20 percent. Whereas here just from February to August is that 3 percent increase in net farm income. So corn from February, corn down 7 percent, soybeans down three and a half percent, fruits and nuts down 16 percent. And I mentioned vegetables and melons being a big winner. They’ve actually revised vegetables and melons up almost 30 percent. And this isn’t 30 percent year over year. This is a 30 percent increase just from February to August. So definitely a strong sentiment there. Wheat is down 13%, cotton down 8%. Another big winner cattle and calves. So the cow-calf producers up 13.9 percent. So almost 14 percent. Dairy down seven and a half. Broilers down two and a half and hogs are down four and a half as well. And I don’t have the numbers in front of me, but eggs are also reported in the USDA numbers.

So what’s causing some of this? The USDA changes their forecast from February to August. The majority of what they’re reporting are the changes in prices, Michael. So as you said, they’re looking at the prices ahead of time. Obviously those forecasts change. The vast majority of those cash receipt changes that the USDA are forecasting are coming from changes in lower commodity prices There is some of it that is explained by quantity, and I would care to guess, I don’t know exactly how they do some of these forecasts and how up to date the data is that they are using in the August forecast. They are obviously forecasting some lower yields. I know that there has been some stress conditions to crops here across the Midwest with heat and drought in certain areas. How much of that data is being captured with this? I don’t know, but they are revising quantity amounts downward from their February predictions.

So I mentioned the net cash farm income, a component of that is direct government payments to U.S. farm producers. From 2022 numbers, USDA is expecting the amount of government payments to decrease as well from 2022 to 2023. So that’s impacting some of these numbers, or at least the net cash farm income numbers as well. So Michael, that’s really the February to August changes that we saw in the USDA farm income forecast.

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[00:09:26] Balance Sheet

Brady Brewer: Now let’s go to maybe longer term and really focus in on 2022 to 2023. And I know you dug into this and in particular, even dug into some of the balance sheet numbers. So what’s changed on the U.S. farm sector balance sheet from 2023, that they just released?

Michael Langemeier: There wasn’t a lot of large changes. They did adjust upward the machinery and equipment considerably. I’m not going to talk specifically about capital expenditures here today, but the capital expenditures were larger than they thought they were going to be in February and last year. And so that number has certainly increased, which increases the inventory value for machinery and equipment considerably. But having said that, real estate or farmland still makes up 84 percent of the U.S. balance sheet and that really didn’t change all that much.

Brady Brewer: Now, historically, Michael, that is slowly creeping upward, right? If I remember the numbers right, just five years ago, it was 81/82 percent.

Michael Langemeier: Yeah, it was closer to 80 percent five years ago, and so it has increased a little bit. And that just reflects the very strong land values we’ve seen in the last couple years. We’ll see how that plays out in the next two or three years where, where land prices are probably not going to escalate near as much.

Brady Brewer: So you looked into the balance sheet. Part of the balance sheet is debt. What is happening on the U.S. side?

Michael Langemeier: Yeah. Let’s take a look at total debt. Then we’ll take, then we’ll take a look at the the non real estate versus real estate cause it is a different story. The debt has pretty much been flat. For the last couple of years, but when you start looking into long term and short term debt, you’re going to see that the real estate debt is actually increased more than the non real estate debt.

Brady Brewer: Now, this is partly due to increases in land values as well, right?

Michael Langemeier: Yes, certainly. I mean, as people buy land they tend to borrow money on that, but also when land is a very valuable asset on the balance sheet, and if you do need some money to buy machinery or buildings and things like that, you can borrow against the owned real estate. And so we’ve actually seen a different trend when you look at real estate versus non real estate. The real estate’s flattened out here the last couple years, but actually the non real estate’s actually declined the last four or five years. And, and now it’s down to about 150 billion, where it was as high as 175 billion if you go back to 2018.

We’ve talked about this before, Brady, I think that’s reflecting the very strong liquidity that we’ve seen in the farm sector. And so some people just simply haven’t had to borrow as much, despite the fact that input prices are relatively high. We are expecting a slight decline in liquidity in 2023, but it’s still really solid. You know, current ratio in 2023 is 2.08. That’s still above that magic two number. And, and my guess, if you break that down into the larger forms, that current ratio probably would be 2.5 or higher. Typically larger farms have more liquidity than the part time farms. Because the part time farms, quite frankly, don’t need as much liquidity. They’re not dealing with near as much working capital issues as the larger farms.

Solvency, obviously, on average is also very low. And if you looked at commercial farms the solvency would be considerably higher, but you’re still not looking at a lot of financial stress in the farm sector.

Brady Brewer: No. The debt to asset ratio is right at 12.7 percent and I know we’ve mentioned this before, you know, the USDA data set if you look at maybe some of the state level associations that exists out there. Their debt to asset ratios are higher, but they tend to have biased samples of farmers that are either growing or new and beginning farmers. Sometimes you can get average debt to asset ratios of above 30 percent and some of those ratios. I’m a believer that the debt to asset ratio that’s reported by the USDA tends to be a lower bound.

Michael Langemeier: Yes, it does.

Brady Brewer: And I know that there are some statistics out there, you know, the Iowa Farmland Survey, which reports over 80 percent of farmland owners, so not farmers. Farmland owners are free and clear on their land. So USDA is probably a better snapshot holistically of all of ag than some of the databases But my point here is I think the debt to asset ratio is higher than that 12.7 number that the USDA releases. It’s still not high enough that I’m concerned. I think most banks tend to, if you think of a loan to value ratio, get a little nervous once the farmer gets above 0.5. There’s definitely farmers out there like that if you’re growing, recently acquired good chunks of property. But, you know, on aggregate, we’re far from that. Now, the current ratio, as you said, came down a little bit in 2023, still above that magic 2. Again, I think that this number, if I were to estimate the probably what I would call the true current ratio, I think it’s a little bit lower than the 2.08, but I still agree with you, Michael. It’s still well in the range of nothing that I’m worried about right now. There seems to be ample liquidity out there. And that’s probably what’s keeping some of that intermediate debt, that you mentioned, stagnant is that the farmers have had the cash to not have to go get the debt for the smaller items on the farm.

Michael Langemeier: Precisely. And when you look at this historically, as the current ratio declines, let’s say in ’24-’25 their type margin years, we’re going to talk about those years of here a little bit, but let’s say they were, let’s hypothesize that they were the current ratio would decline a little bit and you’d see non real estate debt climb.

Brady Brewer: Yeah. And we have yet to..

Michael Langemeier: We haven’t seen that, but that’s what would happen if you had low returns in ’24-’25.

We took a look at net farm income in the last three years compared to all the net farm income since ’73 and adjusted for inflation, and again, the ’22 net farm income really stands out. It’s comparable to a very, very large net farm income that we experienced in 1973. It’s definitely an outlier if you will, when you look at the historical data. When we say that net farm income in ’23 dropped 23 percent, you know, when you first hear they said, Wow, but you got to remember it’s coming down from a very large number of 183 billion in 2022. Yes, it’s still a big drop, but we’re still have relatively strong net farm income compared to the average since 2007. Which 2007 was the start of the ethanol boom.

Brady Brewer: So just to put this in perspective, you know, this is still above the long term average for both net farm income and net cash farm income for 2023. And if you look at what they’re projecting for 2023, it’s still above where the net farm numbers from 2012, which I think was all would agree was a pretty good year. Now it is below 2013 and 2011 numbers. But you know, the fact that it’s in that ballpark, Michael, you know, I think we got to put this net farm income decreasing 23 percent in perspective, again, we’re coming off highs, we’re still in the range of what I would consider good years for most of ag.

Michael Langemeier: I don’t want to belabor that, but just to put this kind of in another perspective is, is I took the average net farm income, and then I did plus one standard deviation and minus one standard deviation. And ’23 is still slightly above the one standard deviation above the long run average. 2023 is not a bad net farm income year, it’s just substantially lower than what we saw in 2022. Now, obviously, when you start breaking that into different crops, some crops or some enterprises are not going to fare as well as others. But that’s always the case.

Brady Brewer: Yeah, so using Michael’s metric, if he does the one standard deviation above and below, if you’re looking at the above, there’s eight years from 1973 to 2023. So 50 years span, eight of those fall above that band. And 2023 will be one of them. So…

Michael Langemeier: And five since 2007.

Brady Brewer: Yes.

Michael Langemeier: The last three years have been above and five since 2007. So that just tells you how good things have been really since 2007.

We’ve already talked a little bit about the change in net farm income. You were saying it was down about 2%. Let’s talk a little bit about expenses and then a net farm income.

So the gross farm income, which was the the receipts that Brady was talking about, you know, and adjusting for inventories is down 2%. The expenses were projected to be up 7%. That was down slightly from the February forecast. But still that’s right on line with where the USDA NASS input prices have been lately. And so, up 7%, you combine that, that gross farm income with total expense, it’s a 23 percent drop in net farm income.

Brady Brewer: Yeah, so fairly significant drop in net farm income, but as we just said, you don’t want to belabor the point, but historically, right in line and above the historical average.

I do want to pay attention to that expense though, Michael. So, you know, so from 2022 to 2023 expenses have increased 6.9 percent from February of this year to August of 2023. They actually revised the total expenses down about one and a half, one and three quarters percent. So they have actually kind of walked back from what they thought total farm expenses would be here in 2023, but it’s still overall an increase from 2022. And if I’m looking at that number, Michael, overall inflation has now dropped to 4%. So, you know, the change from 2022 of last year to change right now here in September of 2023 is right around north end of 6%. You know, I think if we’re projecting what this number looks like next year, these tend to track pretty closely with overall inflation, sometimes a little bit higher but I would expect this to moderate, still be increasing over the next calendar year but it’s definitely gonna be at a slower rate.

Michael Langemeier: Yeah, and remember, this total expenses includes, you know, all the things that you would put into a crop or livestock enterprise, but when you’re talking about livestock enterprise, remember it includes feed. We said that soybean cash receipts were down. Well, that’s part of that reduction in expenses is feed costs are low. Feed costs are lower than what we thought they were going to be, because corn and soybean prices are lower than what we thought were going to be. So that’s where part of that reduction in expenses is coming from, if you dig into the numbers.

Brady Brewer: So this is the aggregate numbers, right? So total gross farm income, net farm income. But Michael, I know you’ve also dug into the rate of return on farm assets, which is looking at this profitability relative to the amount of farm assets it takes to produce that. What, what do we see there?

Michael Langemeier: Yeah. If you look at long run averages, return on farm assets, the current portion, which is exactly what it suggests that that’s what they call it in the USDA ERS data bank, but that’s essentially the current net income. And so the current net income, if you look at it from ’73 on is 2.7 percent rate of return. Well, that seems really low, but you can’t ignore the real capital gains which are associated with farmland. You know, almost all of that’s coming from farmland, and that’s been right at 5 percent since 1973.

So an average real capital gain over that period of 5%, you add those two together, and you’re looking at a pretty respectable rate of return for agriculture of 7. 6%. And so when we talk about agriculture and why outside investors might be interested in agriculture, they’re really looking at that real capital gains and also that current income. You add those two together and 7. 6%, agriculture is not as risky as the stock market. And so a 7.6 percent return is really pretty good when you start comparing with these other assets. And so I always put this together because we need to put in perspective that when we’re looking at agriculture, we have to include those capital gains because farmland is such an important part of balance sheet and everything that happens in agriculture.

Brady Brewer: It is outperforming a lot of stock market classes, maybe not some of the, what I would call the risky, risky stocks.

Michael Langemeier: This isn’t as risky. I mean…

Brady Brewer: I mean other than the U. S. Treasury T bill, I would put ag land as one of the least risky assets out there. Outside the 1980’s, we really haven’t seen much depreciation at all. So it’s definitely a really sound investment. So one of the things, Michael, you know, putting this all together, you guys and when I say you guys you and Jim at the Ag Economy Barometer posed a question, looking ahead to next year, what are the biggest concerns for your farming operation?

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[00:21:40] Farmers Biggest Concern

Brady Brewer: What did farmers say is the biggest concern they have for their farming operation?

Michael Langemeier: So the Ag Economy Barometer August results. It’s still higher input costs. And so I need to explain that a little bit why that’s still the case. Because we said that the input costs have moderated to some degree. And so why are they still saying that input costs are their biggest concern? I think this really has to do with the fact that input costs really haven’t declined. We have such steep increases that we’ve experienced since ’21, essentially the last two years, and they’re kind of stuck at that high level, and that’s why they’re saying that these high input costs are relatively high.

The analogy I use is consumers are still worried about grocery prices. They go into a grocery store, and I myself go into a grocery store, and you’re sticker shocked. If you remember what prices were two, three years ago, it’s the same thing going on here. You know, they probably, the rate isn’t increasing very much, but they’re still relatively high. And so I’m just speculating why people are indicating higher input costs. We take interest rates as a separate category, and that’s number two. And we’ve talked before, Brady, how much interest rates have increased the last year, and so that’s certainly on people’s radar. And then third, not saying that this isn’t a big concern too, but third is the lower crop and livestock prices.

Brady Brewer: On the higher input side, we already said if you track with inflation you know, I, I think it’ll be fairly close to the mid to high fours for next year at these numbers. If it tracks with broader inflation, rising interest rates. So, you know, almost a quarter of the respondents at higher interest rates. Interest rates are going to continue to climb a little bit. On previous podcasts, have mentioned that we think that there’s one more rate hike here through the end of 2023, but it’s probably only going to be 25 basis points or a quarter of a percentage point. So I don’t think that that will be too big of an issue. Are interest costs definitely higher than and 2021? Absolutely.

Michael Langemeier: I think it’s the same thing with higher input costs. Maybe we should change the bucket there. Maybe we should just say high interest rates because they are high compared to what we saw back in ’21, for example, even in early ’22. And even though they’re expected to come down a little bit. In ’24 and ’25, they’re still expected to remain higher than what we’ve been used to. If you look at the 2008 to 2019 period, and so that’s certainly on individual’s radar. It’s on their radar when we ask them about machinery investment, and it’s starting to pick up a little bit when we ask them questions about farmland values. I don’t think it’s really hit the farmland values as much, but what I told someone earlier today, it depends on if the interest rates stay relatively high. If they stay relatively high, that’s going to have a negative impact on farmland.

Brady Brewer: So one of the ones, Michael, that I’m a little concerned about, and if I were answering this question, probably what I would go with, and that’s the farm policy category. So we’re September of 2023, I have yet to see a version of the new farm bill, which is due you know, slated for here the end of 2023. I think that that’s probably a bad omen for it. Normally, by this time, we do have a draft of the bill that’s gone through markup. And we we as the public can see what maybe the policymakers are thinking. I’m not saying that this is going to turn out bad. But I do think that it’s a pretty large question mark that looms over ag right now.

Michael Langemeier: And it could be a shock. Because we haven’t asked a question for the last two or three months in the Ag Economy Barometer, but we did earlier this summer ask questions about what they were expecting in the Farm Bill. And a lot of people were expecting something similar to what we had to the last Farm Bill. That may not be the case. And so what it really comes down to is how different is it going to be compared to the last Farm Bill. If it’s quite different then the concerns about farm policy will increase.

Brady Brewer: I have seen several seminars about this. There was one when we were at our national meetings back in July, several of the economists for the House Ag Committee and House Senate Committee gave presentations, and everything I heard was that changes would be somewhat minimal. But if changes were minimal, I would think that we would have seen a draft by now. So that tells me something has got hung up. Again, I’m not predicting anything bad, but I think it’s a question mark that looms here through the end of 2022.

Now, Michael, you mentioned that you know, the biggest concern on the Ag Economy Barometer was the change in input prices. So let’s dig a little bit deeper into this.

Michael Langemeier: Let’s look at this historically and 2022 really hit agriculture hard, in terms of inflation or changes in input prices. Agriculture production items, you aggregate all of them together. And again, this was all enterprises, including livestock, so feed’s a big component here. But if you aggregate those all together, it was almost triple the inflation, the general inflation rate in 2022. Whereas historically, like you said, it’s much closer to the average inflation rate, maybe slightly higher. So I think ’22 is an aberration. As we look forward here, I actually think price changes in agriculture are lower. If you look from July ’22, July ’23, you’re actually seeing a slight decline in production items. Whereas PCE deflator or general inflation is at 3.3%. And so why are they lower? Well, it’s primarily because of fertilizer, ag chemicals, and diesel. Those are some pretty big inputs, particularly to crop farmers. Those are contributing to the lower, but also feed. You know, feed’s down six percent from July ’22 to July ’23. So this is certainly good news. Obviously we need some more help from input prices, because they’re still relatively high to what they were two years ago. But this is certainly good news, whereas we’ve had mostly bad news with respect to input prices for the last 12 to 18 months.

Brady Brewer: Yeah, definitely the fertilizer is leading the charge in the downward pressure on input prices. The one here that I’m going to be paying attention to over the next year is the wages. It’s currently two and a half percent from July 2022 to July 2023. Wages tend to lag the rest of everything. And since, as we’ve already mentioned, overall inflation has been up at six. It’s currently on its way back down, but it’s been well above this two and a half mark. So I think wages could continue to go up and be above the two and a half mark, two and a half percent mark when we’re doing this next year at this time.

Now, Michael, you translate this into looking at what this means for net farm income for an Indiana case farm. So putting this all together, what do we see kind of moving forward here for the case farm you’ve constructed?

Michael Langemeier: Very aggregate down to west central Indiana so this is this is a big change and what we saw for this case farm is ’21 and ’22, ’21 in particular, were extremely good years. We had decent yields and good prices. And in ’21 we had good yields good prices and low cost. The cost didn’t really start increasing until the ’22 crop and so one of the reasons why the The ’22 net income was lower than ’21 is because were hit by these higher input prices in ’22. And so it doesn’t track exactly what’s going on with with U.S. net farm income. We’re seeing a very large drop in ’23 down to below the level in 2019. So, so a rather substantial drop in ’23. And that’s because we had relatively high input prices in ’23. They were 6 percent higher. Than the ’22 prices. And the ’22 input costs were 22% higher than the ’21. And so we’re still dealing with some pretty large input costs compared to ’21. And we know this fall, corn and soybean prices are down. They’re below breaking even causing the net income to be relatively low.

I’m actually expecting, this is early for a ’24 budget, but I’m actually expecting things to improve a little bit in ’24 simply because that drop in fertilizer costs has had a very positive impact on break even prices. My early projections are that break even prices for corn, for example, are down 10 to 12 percent. I mean, that’s certainly good news. We’re still above where we were in ’21, but we’re moving in the right direction. And more importantly, we’re moving closer to the long run price. If you look at the break even price for rotation corn, Indiana, high productivity soil, this would be corn with 220 bushel. You know, trend average, not one year, but a trend yield of 220 bushel, which is certainly some ground out there in Indiana, Illinois, and Iowa that’s that good a quality. You’re looking at a break even price that’s closer to 4.75. Well, if you compare that to a December ’24 corn price, that’s a little bit below the price. Actually I think we’re moving faster towards a break even situation in ’24 that I thought we would. And it’s because of these drop in fertilizer costs. I’m gonna sound like a broken record, but you can’t overemphasize how important that was to the to the ’24 net farm income when you look at this case farm.

Brady Brewer: So in summary, Michael, as we’re putting all of this together for our listeners. U.S. net farm income is expected to decline from 185 billion in 2022 to 141 billion in 2023. So this is the one that’s got all the headlines, the ’23 percent drop in net farm income. But this forecasted income in 2023, it’s still substantially above the long run average of 94 billion. And the USDA did just increase this expectation from February to what we just saw here in August of 2023.

The U.S. farm balance sheet remains strong. Both the debt to asset ratio remains low at around 12.7 percent and the current ratio, so liquidity and working capital remains fairly strong as well. The breakeven prices for corn and soybeans are expected to decline in 2024. So some good news. And that is mainly driven by lower fertilizer prices for that number. And the net farm income per acre is expected to increase in 2024, but is expected to remain below the long run average that’s been since about 2007. So, Michael, anything else to add here on the farm income side, as we move forward here through harvest of 2023?

Michael Langemeier: Just a comment on farmland values. I’ll make a comment and then have you pipe in to see if you disagree with me.

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[00:31:49] Farmland Values

Michael Langemeier: When we’ve been doing the Ag Economy Barometer over the last two, three months, we’ve been a little bit surprised that there’s still quite a bit of optimism for farmland values. Both short term, the next 12 months, and long term in the next five years. The next five years doesn’t surprise me that much that there’s some optimism there because that’s typical, but there’s still quite a bit of optimism with respect to farmland values in the next year. And I wonder how that’s going to play out given the fact that net farm income is lower this year and with a higher interest rates. My question is, I wonder if the tide there’s going to change. The optimism with regard to short term land values is actually going to decline a little bit as we move into the next few months.

Brady Brewer: So I’ll give my opinion and feel free to disagree with me, Michael. I don’t think it’s going to change the optimism around land prices. First off, the land markets remain thin in terms of supply and all it takes is one buyer out there, or, well, two buyers to drive up the price, one buyer to actually keep the market. And by and large, if you look at the distributions from the USDA farm income, the top end of the distribution Is less impacted than the distribution as a whole. So I think that that coupled with the fact that there’s ample liquidity out there, right? When you’re buying a piece of land, it’s a long term investment. There seems to be liquidity out there for down payments, and I think that’s going to keep the market strong. Now. If we get into a multi year, if this trend of farm incomes keeps going down, which according to your case farm, your case farm in 2024 is up from 2023 levels. But if for some reason we continue to see a slide in farm incomes where we’re well below the long run historical average for a two to three year period and that liquidity dries up. That’s what I think it would take before it reverses my optimism of the land markets. That’s just my view.

Michael Langemeier: I actually agree with you.

Brady Brewer: Okay.

Michael Langemeier: I was just posing the questions. I think we’re not gonna see double digit increases, but I think, you know, increase from zero to 5%, which is consistent with inflation. Would be right on target. And you’re right, I think for the land values to see more weakness, the interest rates would have to stay high, and they are expected to decline a little bit in ’24 and ’25. We use the Fed projections. And net income would have to stay relatively low. And that’s exactly what happened during the 2014 to 2019 period. We had about five, six years there of, of fairly low net farm income. And when you look at the USDA net farm income forecast, it doesn’t look like it’s going to get that low. It might. But that would certainly change our tune if it did. But you look at the ’23 number, and they don’t come out with a ’24 number until November, but I can’t help but believe the ’24 number’s not gonna crash below that long run average. And that’s what it would take. That ’24 net farm income would have to get below the long run average of 94 billion and stay there for a while. If that happens, then you’re probably looking at some weakness in farmland values.

Brady Brewer: Yeah. So you mentioned that agriculture in general, the risk, right? And I know if you’re a farmer listening this, you’re saying there’s absolutely risk and I’ll agree there’s risk in ag. I don’t want to pretend otherwise.

Michael Langemeier: It’s all relative.

Brady Brewer: Yes, it’s all relative. And when you think about it, risk relative to other investments where you can park your money. Agricultural land is one of the least risky assets out there. I mean, next to like the U.S. government T bill that I mentioned earlier. And that’s going to keep money flowing to farmland. Now, one thing I will say that we probably need to take into account is that as the stock market heats up and if returns, especially with high interest rates, right. Investors are gonna start demanding higher returns outta their stocks. That could pull some money away. Some of this outside money that we’ve seen flow to ag. If other sectors of the economy are forced to pay their investors more because of this higher interest rates and inflation. It could pull some money out of ag, but I don’t think it’s going to be significant enough to really impact the markets. Maybe on the margin, it could slow it down, but I don’t think it’s going to decrease it.

Michael Langemeier: I would concur.

Brady Brewer: So with that, this has been a discussion on the USDA farm income forecast that was released here at the end of August 2023. I just want to remind all the listeners for more economic information, visit us at the Purdue Center for Agriculture’s website at purdue.edu/commercialag. On behalf of the Center for Commercial Agriculture, I am Brady Brewer and we thank you for listening to today’s episode.