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October 3, 2023
Weakening Crop Prices and High Production Costs Weigh on Farmer Sentiment
Agricultural producers’ sentiment declined for the second month in a row during September as the Purdue University-CME Group Ag Economy Barometer fell 9 points to a reading of 106. Weakening prices for major crops and ongoing concerns about high production costs and interest rates weighed on producers’ minds this month. This month’s Ag Economy Barometer survey was conducted from September 11-15, 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 Chad Fiechter share some insight into the results of the September 2023 Ag Economy Barometer survey.
The full report is available at https://purdue.ag/agbarometer. The audio transcription is available below.
James Mintert: We’re going to review the results from the September Purdue University/CME Group Ag Economy Barometer. The barometer came down this month. We wound up with a reading of 106, that leaves the barometer down about 6 points compared to a year ago, and 18 points below 2 years ago. You know, the dry weather here in much of the corn belt in August and continuing into September probably has some people on edge.
Welcome to Purdue Commercial AgCast, the Purdue University Center for Commercial Agriculture’s podcast featuring farm management news and information. I’m your host, James Mintert, Director of the Purdue Center for Commercial Agriculture, and joining me today is my colleague, Dr. Chad Fiechter, assistant professor of ag economics at Purdue.
Chad, the barometer came down this month. We wound up with a reading of 106, down from 115, so a nine point decline. That leaves the barometer down about 6 points compared to a year ago, and 18 points below 2 years ago. The barometer got started in the fall of 2015, and the first quarter of 2016, and we use that time period as our base. And so by definition, if you average barometer readings across that time frame, it averages out to 100. And we’re getting kind of close to that.
Chad, I should introduce you to the audience. You’re a new assistant professor here in the department, just a recent PhD graduate, but during that 2015-2016 time frame, you were farming, here in Indiana. Chad thinking about your experience do economic conditions today feel like that 2015-2016 era?
Chad Fiechter: Well, thanks, Jim. Feels like I’m in the big leagues here. Really thinking back and having my livelihood tied to where’s my financial conditions at on the farm, it, it seems like, yeah, we’re, we’re coming out of a good financial period, and I think we probably still feel like we’ve got some assets. We got a little bit of a war chest built up, but looking ahead, there is concerns.
James Mintert: Yeah, and that’s pointed out in our survey, I guess, as well. The Current Condition Index was down 10 points compared to last month. That leaves it down 10 percent compared to a year ago. Future Expectations Index was also down 10 points. That leaves it down compared to last year as well, but not as much as the current conditions. I think it was down 3 percent compared to a year ago. But, you know, the Current Condition Index is a reading of 98. So again, thinking about that 2015-2016 era, it’s right in the ballpark of where we were in that time frame. The Future Expectations Index is a little bit higher at 109 than it was back in ’15 and ’16. But again, I think it points to the idea that people are a little concerned both about the current situation and looking ahead and maybe wondering about I’m going to say a cost price squeeze, right, with weakening crop prices in particular and still elevated production cost, right?
Chad Fiechter: Yeah, before we recorded, I just went back and looked, you know, the month previous. For me, corn and soybean prices, those are the ones that normally I’m the most interested in. And you know, soybeans were a little higher. And, and corn was basically flat, so it’s not necessarily that our prices are significantly worse than in, in August, but it’s definitely the uncertainty of harvest and, and what do we have could be making it feel a little bit more negative.
James Mintert: You know, the dry weather here, the last in, in much of the corn belt in August and continuing into September probably has some people on edge with respect to how harvest might turn out. A lot of uncertainty. Early yield reports have been good in most locations, but there’s some variability out there, right? There’s some, there’s some places where it really got hurt and I think there is some uncertainty, maybe more than than you might normally think here in, in late September, mid September, so.
The Financial Performance Index came in at a reading of 86. That index has basically been unchanged now four months in a row. Our first reading of 86 was back in June, so we’ve been in that 86/87 range four months in a row. That index is down 13 points compared to a year ago, and 24 points below two years ago. And I guess when I look at the financial performance index, I’m a little surprised that it’s hanging flat here these last four months, given what we’re seeing with respect to both the barometer and the future and current expectation indexes.
However, having said that, when I compare it to last year, we’re 13 points lower than last year, 24 points below two years ago. Those comparisons make a lot of sense to me in terms of financial condition. What’s your take?
Chad Fiechter: The recent flatness is puzzling. Especially with kind of crop prices and where we’re at, I would have expected it to kind of come down. But relative to the year prior and two years prior, yeah, it makes total sense.
James Mintert: Yeah, I kind of feel like the year prior and in that sense, maybe financial conditions haven’t really deteriorated much over the summer. And I think that isn’t, you know, if you’re looking at people’s balance sheets and their income statements, maybe that’s true. Although income statements
Chad Fiechter: Yeah, I mean, that’s not the hard part. I mean, I think it was, you know, 21st of June or something corn was over six bucks. Like that’s a pretty big change
James Mintert: Yeah, that’s a big hit, yeah.
Chad Fiechter: That’s, that’s huge. So I think that’s why it’s puzzling from a June number to now that feels.
James Mintert: Yeah, that, that’s a good point. You’re right about that. We continue to ask a question that says, looking ahead to next year, what are your biggest concerns for your farming operation? We started asking this question in January. We’ve been asking it every month since, and I think the January to now comparisons are kind of interesting. So across the board, the number one choice continues to be high input cost. In January, 42 percent of the people in the survey said that was one of their biggest concerns. This month, it was 32%, so not as many people choosing that now as back in January. And I think that’s probably reflective of the fact that, in particular, fertilizer values have weakened, but other costs have not. The change or on the other two has been kind of interesting that the two follow ups though have been rising interest rates.
Back in January it was 22% percent choosing that as a, as a top concern. So that came in second place. Third place was lower crop and or livestock prices. Back in January, 16 percent of the people were choosing that as a big concern. This month it was 22%. So those are the top three concerns. The other things we have in the survey really isn’t attracting much attention. We had environmental policy, farm policy, availability of inputs. None of those are big concerns at the moment. So it is interesting that we’re seeing this rising impact on interest rates and this bigger concern about lower crop and livestock prices. But I know the higher input cost is kind of interesting. We’ve had a little pushback interacting with with some people in the agribusiness community on that. You might, might elaborate on that a little bit, Chad.
Chad Fiechter: We had some ag retailers around the department in the last few weeks. And this, this definitely was a little bit puzzling to them, but maybe the higher input cost, Jim, maybe it’s it should be Instead of higher, just high input cost, right? Like, maybe relative to a year ago, we might just have flat to a little bit higher seed cost, but those are still high seed cost.
James Mintert: Yeah, I that’s a good point the question going back to the beginning, it was phrased as higher input costs, so we stuck with that terminology. I’m pretty sure, I feel reasonably confident, that when producers answer the question, they’re thinking just high, right?
They’re thinking historically high input cost. And maybe another way of putting that, or looking at that, is thinking about their break even prices. And when you look at the break even prices, whether it’s the prices that Michael Langemeyer computes using our Purdue crop budgets, or Gary Schnitke at the University of Illinois, or, or the farm management people at Iowa State, all of those production costs on a per bushel basis are very elevated compared to historical norms. And I think that’s what’s got people worried. It’s not so much that inputs are higher now than they were a year ago, it’s just that they’re high.
Chad Fiechter: Yeah. Well, and it too, it seems like the cost is the thing that we can control as producers, right? Simple economics says we’re the price takers, right? So we can complain about prices, but maybe more we’re worried about is our cost structure and that that still seems like we’ve got high costs.
James Mintert: And I think the pushback from retailers, and I’ve gotten some pushback on some other interviews I’ve done. Focused primarily on the fact that fertilizer prices have come down since the beginning of the year and have come down significantly but at the other input costs have largely have not. Now we’ve got some uncertainty with respect to what herbicides and insecticides are going to cost next year and fungicides. We’ve got some uncertainty with respect to what seed costs are going to be. Although, there have been quite a bit of seed sold so far. I haven’t seen any direct readings on prices yet. I need to kind of visit with some folks about what they actually wound up paying for seed. But there has been quite a bit of seed sold already for the ’24 season. So but I haven’t seen much evidence of those weakening. And so those input costs are still high by historical standards.
The Farm Capital Investment Index this month went up two points. That’s really kind of trivial in the sense of being a significant change. So really kind of not much change at all. But if you compare it to a year ago, it is up eight points, 39 versus 31. So a little stronger compared to last year. Two years ago, we’re, what, four points below that. I think two years ago, we were at 43. So the investment index has been kind of interesting because month after month, the majority of the people in the survey tell us it’s a bad time to make large farm investments. So that’s, you know, you have to think about that context.
But when we did the follow up question, and we’ve done it two ways now, we follow up and ask people who tell us it’s a bad time to make investments why they feel that way. And you know, going back to, I think the first time we asked this question was back in the summer of ’22. And depending on the month, between 44 and maybe 49 percent of the people in the survey last summer were telling us it’s because of high machinery prices, high cost of new construction.
This month, that’s lower. We’ve, we’ve definitely seen a change. We’re down about 36 percent of the people in the survey telling us it’s because of high prices for farm machinery and construction. So that’s, that’s been a change there. The bigger change though is the percentage of people who are choosing rising interest rates as a, as a reason why it’s a bad time to make large investments.
First couple times we asked this question, it was what 14% of the people said it was rising interest rates. The second time it was 18%. Third time it was 21%. Now that’s up to 40% this month. 35 percent last month. So we’ve really seen a change there. In fact, when you look at the chart and just look at the interest rates, you can really see the upward trend there in terms of how many people are worried about interest rates and you know, we were talking beforehand, you know, what, what we’re looking at, if you’re going to buy a new combine today and pay market rates, what kind of interest rate are we looking at?
Chad Fiechter: If it’s not coming, if the, if the companies aren’t going to subsidize our rates, right? If they
James Mintert: Yeah, exactly.
Chad Fiechter: if they don’t want you to be buying that combine necessarily, trying to encourage you with their financing deals. I mean, we’re, we’re, we’re getting into probably that 8, 9, 10 percent. Which is a lot of money, right? When you’re, when you’re looking at the the expense of the machines today.
James Mintert: Yeah. With prime in that mid eight eight and a half range. Right. You’re probably looking at operating loans for most folks. Nine point half to 10%. Yeah. Depending on the situation. Some folks are able to borrow money at prime, but a lot of, a lot of ag loans are at a premium to prime. So operating loans, machinery loans, yeah, if they’re not being subsidized, those are pretty big numbers. And some of the subsidies are for relatively short time frames, so you’ve got to think about what I’m going to have to pay. after the subsidized period is over, et cetera. So it’s starting to have an impact, causing people to think about it and maybe pull back a little bit.
So the last three months we’ve asked the people who tell us it’s a good time to make large investments. You know, what are the reasons why? And we give folks some choices on this question. So the choices are strong cash flows, opportunities to expand the farm, invest in new technology, hire dealer inventories, and then the catch all, the ubiquitous other category, to catch all the stuff that we didn’t list.
And I want to caution listeners on this. This is a small number of people responding to this question because a relatively small number of people in the survey are telling us it’s a good time. But those that do are pointing mostly to strong cash flows. First time we asked this question was in July. 40 percent of those who said it was a good time said it was strong cash flows. In August, it was 41%. This month, it was 32%. So that’s kind of interesting. That’s reflective, I think, of what you were talking about, Chad, with respect to how the weakness in crop prices we’ve seen since June, for example, is maybe starting to show up a little bit there, right? The strong cash flows are maybe not quite as strong.
The other factors, you know, are kind of hanging in there. It’s invest in new technology has been bouncing around. But again, it’s not a lot of people. I think the first time we asked it was 19 percent of the folks that said it was about technology. The last couple times it’s between 7 and 11%. Opportunities to expand is maybe not a big of a factor is I would’ve thought, I think the first time it was 10%. The last couple times it’s between four and 5%.
You and I were talking about this beforehand. We’re getting a relatively large number of people are choosing other, which means, you know, we don’t we don’t know what they’re thinking, right? The first time that 18 percent shows other this time it was 30 percent of those who said it was a good time to make investments where it had some other reason going on. Which we’re kind of scratching our head trying to think about what that other reason might be.
Chad Fiechter: Well, I’m just thinking currently as we’re looking at this slide. You know, I wonder if it is, we saw in an increase in the index is that you’re saying, wow, a year ago was a terrible. We were going to get fleeced when we bought anything. And now we’ve said, that’s a new normal and we need to update some stuff. So our cash flows, maybe is that the reason we’re calling it or do we just need to do some updating?
James Mintert: Yeah, and higher dealer inventories isn’t showing up as a big deal. However, in July, higher dealer inventories was 12%. In the last two months, it’s between 21 and 24%. And the dealer inventories is interesting because, you know, just a week or so ago, Deere announced that they were laying people off at their combine plant in Moline, Illinois, suggesting that they had ample combine inventories. I looked at the Association of Equipment Manufacturers data, and when you look at that data the most recent report is for August, so the most recent estimate for the inventories is the beginning of August. Those combine inventories on dealer lots are up significantly over the course of the last year. So, the tightness we experienced in combine inventories is in machinery in general appears to be mostly behind us. It’s, I’d say it’s especially true on the combine side. Looking at the numbers, combine inventories were kind of back to normal. Whereas for a while they were very, very tight as, as listeners know. That does not appear to be the case anymore. In fact, you can kind of see that driving around the Midwest, right?
Chad Fiechter: For sure.
James Mintert: Yeah, for sure. Dealer lots have combines on them now and they didn’t for a while, right? So, been a bit of a change there.
That’s a question we’re going to continue to ask because it’s not everybody in our survey is really in a position where they could ever maybe make investments in brand new farm equipment. So the folks that are interested in making purchases and learning a little bit more about what they’re thinking is going to be something we continue to focus on going forward.
Always interesting to see what farmers have to say about farmland values. We do it two different ways. Of course, the Short Term Index looks at their perspective on farmland in the upcoming 12 months. The Long Term Index does it on a five year basis. The Short Term Index was unchanged, 126. It’s been sitting in the same place, kind of like that Farm Financial Performance Index, been sitting in the same place for the last four months. That’s after being as low as 110, so it’s up about 16 points compared to its low point, which was earlier this spring. And if you look at the raw responses, that’s maybe almost more interesting. So looking at the percentage of people who say farmland values are going down, that percentage declined this month to just 10% percent.
At one point we between 19-20% of the people in the survey earlier this year thought farmland values were headed down. And now that’s and then the percentage of people who think farmland values are going up over the next year has been basically cut in half. That kind of explains the strength that we’re seeing in the index. The percentage of people who think farmland values are going up over the next year has been kind of floating between about 35 and not quite 40 percent. I think 39. This month it was 36 percent. But that percentage who have a negative perspective has been cut in half since earlier this earlier this year. I guess that was back in about March. That’s interesting. And the long term index is up I think two points this month compared to a month earlier. And again, it’s been sort of in the same place for four months in a row. I think three months in a row it was basically sitting at 150 or 151. This month, 153. Again, that index bottomed out, I think, back in February. And it was in the mid 130s at that point. So compared to that point, it’s up about almost 18 points, 17, 18 points. As an economist, I find this a little bit puzzling, right? Because interest rates are going up. That should put negative pressure on an asset value like farmland. We think that margins, particularly for crop farmers, are tightening.
Chad Fiechter: Mm hmm.
James Mintert: That combination should normally be expected to produce some pressure on farmland values, and yet every time you hear an auction result, it’s either a new record or at least very close to the previous record, right? We haven’t seen any real evidence of weakness in the auction market. So I’m gonna, I’m gonna flip to you. Maybe you’ve got a better explanation because Michael Langemeier had been talking about this on previous podcasts now for some time. This is a little bit puzzling to see this kind of strength in both of those indices.
Chad Fiechter: Yeah, the land market’s fascinating. It seems like the demand for land is, is still high. And so whether we’re holding onto all that cash from before and we still really want that piece of land and maybe our neighbors do as well and they did pretty well the last few years too. But I also think this slide of non farm investor demand, at least from a perception perspective the alternative investments don’t look quite as good currently. And so I think that if you’re a person who, you know, may not be in the ag sector, but you, you know about farmland, I think it still looks like a pretty attractive investment vehicle. And so if we, even a few of those people moving over and being really interested in farmland, I think could keep our prices high. And from an ag perspective, it still seems like farmers have some money to be playing in the space.
James Mintert: Yeah, it’s very interesting. So the follow up question that Chad was referring to is if you say that you think farmland values are going to rise over the next five years, we come back with a follow up question, which is what is the main reason you expect farmland values to rise?
We started asking this question, I think, in the beginning of 2022. And the first time we asked it, I was surprised. I think that time, I think 45 percent of the people in the survey said it was because of non farm investors. So the most recent survey, that’s 58%. So clearly respondents to the survey think that the attractiveness of farmland to non farm investors is still very strong. And, when you talk to auctioneers, they basically tell you that they do have non farm investors present at their auctions, but when we hear the record high prices, those are always farmers betting against other farmers, right?
Chad Fiechter: You know what I just explained it away as the one sitting here, you know saying I think maybe it is outside investor demand. But yeah, almost all of those high prices are coming from farmers against farmers.
James Mintert: The records always, I shouldn’t say always, but almost always are a result of two farmers, or perhaps more, bidding against each other on a property that they both really want badly. Whereas the non farm investors, when again, when I speak to the auctioneers, they tell us usually the non farm investors are being very cognizant of the investment value and look at it perspective return on investment. And tend to be a little bit more conservative. So it’s really interesting. We’re going to continue to monitor this. And so far ,the farmers have been more correct than the economists. Let’s put it that way,
Chad Fiechter: Yeah, that’s exactly right.
James Mintert: Economists have been the one saying that they thought farmland values could soften and farmers were saying the opposite.
Chad Fiechter: Maybe they just stopped believing us.
James Mintert: Yeah, there you go. There you go.
We try and ask some other things every month because it doesn’t take that long for farmers to respond to the survey. So we usually do some follow ups. This month we had some questions about cover crops, largely because this is a time of year when people are thinking about cover crops. And if they’ve already started to harvest, maybe started to plant some cover crops.
So this question only went to corn and soybean farmers. We asked, do you plant cover crops on your farm? 52 percent of the corn and soybean farmers said they plant cover crops on at least some of their acreage. And then we did the follow up and said, what percentage of your acreage do you plant it on? And nearly half of them said they do it on 25 percent or less of their acreage. And so you know how the question was phrased. Because it’s a phone survey, we do this in buckets. And so the smallest percentage bucket was 25 percent or less. So 47 percent chose that bucket. We don’t know how much less than 25%. I suspect some of those are putting it on a very small portion of their acreage.
I continue to be surprised. We’ve asked these questions several times now, and that that 52 percent of farmers saying they plant cover crops, it’s very little bit. We’ve asked that, I think, at least three different times. And it’s floated around that 50%, just above or just below 50%. That surprises me that high of a percentage of farmers say they plant cover crops. I suppose it’s probably a function of the fact that people are, at least some of those folks are planting on a very small acreage. Because we certainly don’t see that in other data sets.
Chad Fiechter: Yeah, I have to agree. And I think you’re right. It has to be that 25 percent or less. Even 50 percent at 25 percent of their acres. I don’t think we’re seeing that either. So it’s probably just that experimentation. A little bit or our fields, you know, that would really benefit from cover crops.
James Mintert: Yeah, I wonder if it’s a fact maybe some people are really targeting some fields they think would really benefit maybe for erosion control, for example. And people point out that they have varied reasons for planting cover crops. And the other thing is in our subsequent questions, a high percentage of the folks in the ballpark, a half, I think, between 40 to 45 percent or so, tell us they’ve been planting cover crops less than five years, so they’re still maybe in that early experimentation stage.
There are a group of people out there, though, that have been planting cover crops for a long time. Because one of the buckets is, I think, 20 years. And we’ve got, depending on the month, between 10 and 14% telling us that they’ve been planting for a long time. So we’ve got the extremes out there. We’ve got people telling us that they’re kind of fooling around with it a little bit, trying to learn a little bit. But we’ve also got some people who are long term committed. There’s a few more details available in the slide deck, if you download it, with respect to some of the cover crop questions, you can take a look at that on your own as you have an opportunity to do so.
So I just want to remind you the full report of this month’s barometer is available Purdue/CME Group Ag Economy Barometer website, which is purdue.edu/agbarometer. And of course you can download the slide deck that Chad and I were looking at as we were discussing this month’s result. That’s available here with the podcast. It’s also available on the Center for Commercial Agriculture’s website, which is purdue.edu/commercialag.
I want to thank Chad Fiechter for joining us today. Chad’s a new faculty member. He’d done some research, part of his dissertation actually involved using some of the data from the barometer. He’s got another paper you trying to publish that’s using some data from the barometer. So it’s good to have you join us on the podcast and look forward to having you on here in the future.
Chad Fiechter: Yeah, thanks. It’s great to be here.
James Mintert: On behalf of the Center for Commercial Agriculture, thanks for joining us. I’m Jim Mintert.
December 13, 2023
The 2023 Ag Tax Webinar, part of the Purdue Income Tax School, will provide in-depth coverage of selected agricultural and farm income tax issues to supplement material provided at the two-day in-person or virtual tax schools. The 2023 webinar will be taught by Guido Van Der Hoeven, an expert on agricultural tax issues and one of the authors of the 2023 Agricultural Tax Issues book, on Monday, December 13, 2023, starting at 9:00 am ET.Read More
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A management programs geared specifically for farmers. Surrounded by farm management, farm policy, agricultural finance and marketing experts, and a group of your peers, the conference will stimulate your thinking about agriculture’s future and how you can position your farm to be successful in the years ahead.Read More