---

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 today, James Mintert, director of the Purdue Center for Commercial Agriculture. And joining me today is my colleague, Dr. Michael Langemeier, who’s a professor of ag economics here at Purdue and he’s also the associate director of the Center for Commercial Agriculture.

We’re going to review the results from the December 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 4th through the 8th of December.

And Michael, the Ag Economy Barometer index fell one point compared to last month, so that’s an insignificant move. However, it was 12 points lower than a year earlier and 11 points below two years ago. And if you look underneath and kind of dig into what was going on, the Current Condition Index was down one point compared to last month, but it was down a whopping 23 points compared to December of 2022. Future Expectation Index was down one point also, compared to last month. It was 7 points lower than it was in December of 2022. So Michael thinking about sentiment, where it’s at, thinking about the current condition index, future expectation index. First question. Were you surprised?

Michael Langemeier: Not really. And one of the things that I, I, I kind of, kind of saw this coming is it is down from a year ago, it is down from two years ago. I think that’s very logical. I mean, margins are tighter, uh, tighter, uh, in ’23 than they were in, in, in ’21 and ’22. So you’d expect the index to be, be down a little bit.

Uh, I, perhaps I was surprised it was, it was down one point. I thought maybe it might be up slightly because Last month, we talked about the fact that we thought crop yields were, were impacting the Ag Economy Barometer. Well, that it really hasn’t changed. Uh, and so that fact really hasn’t changed, but, uh, uh, so I guess the bottom line is the fundamentals haven’t changed that much. So why would we expect a big shock?

James Mintert: Yeah, and I think maybe, even though I just made comparisons to a year ago, I actually think maybe the better comparison might have been towards late summer versus where we wound up here in December.

Um, sentiment is stronger than it was, uh, at the end of the summer, the beginning of fall harvest. And I think as people progress through fall harvest, we can see it in the data. We saw an improvement in the barometer. We saw an improvement in the current condition index as we headed through the fall. I think that reflected the improvement in yields we were picking up when we talked to people, not only in the survey, but just talking to people when we were out doing meetings.

And then I think the related point is, you know, USDA at the end of November came out with their updated farm income estimate, and I think on an inflation adjusted basis, that was up roughly 10 billion compared to the forecasts that they issued in late summer. I think they were picking up the exact same thing the farmers were picking up, that things were a little better, uh, here at the end of the year, in retrospect, than the expectation was in late summer, and I think that’s, that showed up in our surveys across the fall. We saw an improvement, uh, across the board, and, uh, I think a lot of it was driven by the fact that income levels were a little better than people expected.

So if you take a look at the Farm Financial Performance Index, that kind of reflects that as well, I think. The index reading was 97, up two points compared to a month ago. It’s down compared to a year ago, 12 points below a year ago, 16 points below two years ago. I’m going to contend, kind of like you just said, that makes a lot of sense. 2022 was record high farm income. ’21 was not quite as good as ’22, but almost. Um, and so ’23 is a little weaker. Okay, that makes a lot of sense.

But again, as you look at the data on that Farm Financial Performance Index, it bottomed out in May at a reading of 76, then kind of improved and then flatlined a little bit over the summer at a reading in the middle 80s, 86-87. October was stronger, November was stronger, and now December was stronger.

So, we’ve been up three months in a row. We’ve climbed from 86 up to 97. I think that matches up perfectly with what we’re picking up elsewhere in the survey. What do you, what’s you take?

Michael Langemeier: Yeah, I think it’s very consistent with the story you were talking about earlier that, that sentiment improved as we went through harvest season.

James Mintert: Yeah, people felt better about their farm’s financial situation, and a big chunk of that was out of revenues coming out of improved crop yields.

We keep asking this question, we ask it every month in 2023 and we’ll probably keep asking it in 2024. Looking ahead to next year, what are your biggest concerns for your farming operation?

To me, Michael, I thought this was a good chance to make a comparison between January and December. How people felt at the beginning of the year versus how they felt at the end of the year. Beginning of the year, the number one concern was higher input costs. That was chosen by 42 percent of the people in the survey. At the end of the year, it was still the top concern, but not chosen by nearly as many people. I think 31 percent of the people in the survey chose it at the end of the year on the December survey.

This big change in this survey, responses to this survey question over the course of the year, was the percentage of people choosing lower crop and indoor livestock prices as their number one concern. Beginning of the year, only 16 percent of the producers in the survey chose that as their top concern. At the end of the year, that was up to 26%. I don’t know about you, Michael, but when I look at the numbers on the charts, it’s starting to look a little more normal.

Michael Langemeier: Yes, definitely the case. And let’s just try to explain that higher input cost a little bit. I mean, input costs, if anything, have been relatively flat most of this year. And so why is that still chosen as the number one reason? Well, I think it’s the difference between price level and rate of increase. The price level for a lot of inputs, with the exception of fertilizer, Uh, perhaps, and, and diesel, but the price level for a lot of the, a lot of the inputs for agriculture are still elevated, uh, compared to what they were in, in 2020, uh, for example, or even 2021. Um, uh, and so I think that’s what people are looking at. Uh, we’re still seeing some fairly high prices for inputs, therefore this is a concern.

James Mintert: Yeah, that’s a good point. You know, when I make presentations, I have a chart that I use where I normalize input values for fertilizer and diesel fuel, and the normalization period I use is 2014 to 2016. And when you compare current prices for fertilizer, for example, which has come down substantially over the last 12 months, it’s still significantly higher than it was in that 2014-2016 period.

Same, similar story for diesel. It’s come down a lot, uh, compared to where its peak was, but it’s still above those levels that we observed previously. And I, it really gets at this issue of What is an individual’s anchor point? What, what number in your mind do you kind of view as, as normal? And, and I don’t know, I can’t say, uh, with any strong conviction that 2014 to 2016 is, is the anchor point for a lot of people, but it’s certainly some period in the past prior to this big run up in values that we saw, and people are looking at it and saying these costs are still high. Right?

And it shows up in your break evens. You’ve been doing the crop return budgets, and you’ve updated those recently. Just, just an illustration. Kind of tell us what the break evens are for corn and soybeans, versus what they used to be.

Michael Langemeier: Going back to 2020, for example, on high productivity soil, which would be soil with a corn yield of 220 bushel, trend yield of 220 bushel, you were looking at a break even price right around 4. Right now, 2024 looks lower than 2023 by about at least 5%, maybe a little bit more than that. It’s still 5. And so a 25 percent increase.

James Mintert: Yeah, I think that tells the story right there, right? You think about it on a per bushel basis, these costs are still extremely elevated. Not as bad as they were a year ago, and that’s the good news, but still extremely elevated.

Michael Langemeier: And then the interest rate, the interest rate chart is also quite interesting. It’s been very flat. It really hasn’t, it really, it was a little bit lower in one of the months during this year, but it’s been right around 20 to 25 percent the entire year.

James Mintert: Yeah, and we’ll talk more about interest rates a little later because we have some other questions on that, but I think part of that could be a reflection of just the uncertainty about interest rates, right?

—
[00:08:22] Farm Capital Investments

James Mintert: So Farm Capital Investment Index at 43 was up one point compared to last month That’s a trivial move in terms of being statistically significant. It’s three points higher than a year ago, six points below two years ago. If you look at it on a chart It’s kind of a sideways move. We’ve been in a trend. Um, the lower bound, I guess is about 30. The upper bound is just short of 50. I think the upper band is that 49. So we’ve been kind of hanging in there. Uh, it just kind of bounces around and that somewhere in that 40s, 40 to, uh, well, I guess I said 30, but it really hovers are closer to the 40 range above and below 40. Um, you know, we’ve talked a lot about what the Farm Capital Investment Index measures.

I think it’s a pretty accurate reflection of the people we survey, but demographically, we’ve got a lot of folks in our survey who probably don’t have a strong enough financial position to actually step out and buy new farm equipment at today’s prices. And I think that probably influences the readings we get from that Farm Capital Investment Index.

Michael Langemeier: Yeah, like we’ve said many times before the Farm Capital Investment Index is not necessarily measuring capital expenditures, because when look at USDA ERS data, capital expenditures are quite high, uh, each of last three years. And so, uh, that’s, that’s, that’s that’s an empirical fact. What I think it’s measuring is, uh, whether they think it’s a good time, uh, to buy machinery. And that’s where the questions were, is this a good time or a bad time? And several people are saying it’s a bad time, simply because prices are high, or interest rates are high, or they don’t have the cash to buy, uh, new machinery.

James Mintert: Yeah, we do the follow up. If you say in the survey that it’s a bad time to make large investments, we do a follow up and ask well, why do you feel that way. And the top two reasons as you pointed out, Michael, are the increase in prices for farm machinery and new construction that was number one for a long time But more recently the rising interest rates has become the dominant factor I think for four months in a row now, the number one factor has been the increase in interest rates that people have been citing as a reason why this isn’t a great time to make, uh, to large investments.

And then a few months ago, we started asking the people who say it’s a good time to make large investments. Why do you feel that way? And I have to throw a little caveat in here. We probably should have started asking this question sooner. We held back on doing it because every month, a majority of the people in the survey tell us it’s a bad time to make large investments. So the percentage of people in the survey each month who say it’s a good time to make large investments is relatively small. So statistically, we had a little less confidence in the results. But we’ve been asking this now six months in a row. So I think maybe we’re starting to get some confidence in the results here.

And, and, you know, people are pointing to a couple of things. The first few times we asked it, They pointed mostly to strong cash flows. Um, here on this most recent survey, uh, we’ve seen a little bit of a change over the last several months. A significant number, I think 30%, said it’s still strong cash flows. But the change since we first asked this in July is the percentage of people citing higher dealer inventories for farm machinery. First time we asked it in July, only 12 percent of the people in the survey pointed to the higher dealer inventories. These last couple times, it’s been up around 30%. And I, you know, Michael, when I drive around the state of Indiana, when we, you know, you and I are out doing meetings and visiting with folks. You can see it, right?

Michael Langemeier: Definitely.

James Mintert: It’s obvious on those dealer lots. There’s a lot more equipment, a lot more new and used equipment sitting on those lots than there was two years ago or even a year ago.

Michael Langemeier: And a variety too. It’s not just tractors, or not just combines. It’s a variety of machines.

James Mintert: Yeah. So that’s, that’s really changed and I think, you know, my interpretation of that is those higher dealer inventories point to the idea that maybe you’ve got some bargaining power, right? And that makes it a little better time to perhaps, uh, to make a deal or make an investment.

—
[00:12:18] Farmland Value Expectations

James Mintert: Farmland values is always interesting. The short term Farmland Value Expectation Index reading of 121, um, was down four points compared to last month.

I think maybe down about three points compared to a year ago. And, you know, if you go back to two years ago, um, Gee, that index was all the way up at 153, so we are significantly lower than we were a couple of years ago, and maybe down a fraction compared to last year. You know, if you look at the chart, it’s kind of flat compared to last year. We took a dip in the middle of the year, but we’ve kind of bounced back from that. Um, sometimes it’s more interesting to not look at the index, but rather to look at the actual responses to the question. So the way the question’s phrased is, you know, do you expect, what do you expect to see happen with respect to farmland values in your area in the next 12 months? Higher, lower, or um, you know, the no change category. And Michael, when I look at this chart, I can see a little more clearly what’s going on. What’s your take?

Michael Langemeier: Yeah, certainly there a little bit more weakness, particularly compared to last year and two years ago, but that’s also very consistent with the movements in the Ag Economy Barometer. These are quite linked. These short run price expectations, it’s closely linked to the Ag Economy Barometer. They bounce around a little bit differently, but in terms of a long term trend, they follow one another.

James Mintert: Yeah, so just to put that in perspective, and I think when you look at this chart, and for those of you listening just to the podcast, if you download the slides that go along with the podcast, you’ll see this very clearly.

The way the index is computed is, as long as the index value is a value above 100, that means more people in the survey said they expect to see farmland values go up than expect to see it go down. So, the index is still positive. It’s still above 100. We’ve got more people saying farmland’s going up than going down. But you can see the change in sentiment take place. Two years ago, 59 percent of the people in the survey said they expected to see farmland values go up over the next 12 months. A year ago, that was 39%. This month, it was 35%. Two years ago, only 6% of the people in the survey said they thought farmland values would weaken in the next 12 months. Last year, at this time it was 15%. This time around it was 14%. So you can just look at that chart and see the change in sentiment. On average, people still think farmland values are headed higher. But there’s a lot less confidence in that forecast, is how I’d put that, Michael.

Michael Langemeier: Yeah, and certainly the, the, the, uh, the, the individuals that, that think farmland values are going to go down, that’s been hovering, hovering right around, uh, 15%, 10, 15 percent all year. Well, you have to go back to the middle of 2020, uh, to get that higher percent. And so it’s, it’s certainly a different situation than what we saw in ’21 and ’22.

James Mintert: Yeah, and the long term index this month did take a bit of a dip. So that’s two months in a row now that index is backed off. Um, I think this month’s reading was 149. Uh, that was down a couple of points. Um, it’s nine points higher than it was this time last year. You know, last year, I think we were probably picking up a little more concern about the interest rate situation and it was maybe having some impact on the long term expectations. But again, like the short term index, well above 100. So on average, people still expect farmland values to increase over the next five years. Um, And the difference between the responses, when you look at the chart for the five year question versus the twelve year question, twelve month question, is actually markedly different. You know, that twelve month chart, you can really see the dip in the percentage of people who think farmland values are going up. That’s not true when we ask about the five year outlook. Um, it’s relatively flat. I think it topped at about 68 or 69 percent saying they expect to see farmland values go up. That was a couple years ago. This month it was at 61 percent, think it’s going to go up over the next five years. So people really haven’t lost their confidence per se, and from the five year perspective, whereas on the one year perspective, people are definitely less confident that farmland value is going to keep going up.

Before we started recording, we were talking a lot about this expectation about, you know, why do people think farmland values might rise over the next five years, and what might cause that, and maybe what some implications are with respect to the outlook in these next couple of years.

Michael Langemeier: Yes, were talking about that before we started here today and one of the reasons this is so interesting, we follow up by saying what is the main reason you expect farmland values to rise and overwhelmingly, since we started to ask this question, uh, in January ’22, individuals say it’s non farm investor demand. Uh, I think it’s a little deeper than that. Uh, but that’s certainly the, the, the number one factor. Uh, the inflation has been important off and on here for the last, uh, one to one to three years. Uh, and so inflation’s also, uh, relatively important, but it, uh, that non farm investor demand is overwhelmingly, uh, picked as the number one reason. Uh, strong cash flows come in there well below, uh, in, uh, inflation, uh, and, and non farm investor demand. But one of the things we were talking about and, and, uh, that I think is important and we’re not really picking up with this chart because we don’t ask, ask it specifically and it’d be hard to ask.

Is, is the fact that we’ve got such strong balance sheets that has to be impacting how people view farmland values. And when I say strong balance sheet, it’s strong both from a current standpoint and a total standpoint. So we have very strong working capital right now. Uh, if we have low net returns next two or three years, that’s certainly going to decline. But right now we have very strong working capital positions on, on, on most farms. But also, uh, the debt to asset, or the leverage, is really low, uh, for the, for the, the, uh, the, uh, agriculture sector in aggregate, but also for a lot of individual farms. That makes a lot of difference in how you view farmland values, how you view your, uh, uh, the affordability of farmland.

James Mintert: Yeah. So one of the things we were talking about earlier was the fact that, you know, if you think about what’s taking place here in, in 2023, cash flows are weakening. Compared to where we’ve been these last couple of years and then secondly we’ve had this rise in interest rates has taken place over the last year and a half now or a little over a year and a half. And from an economist perspective, you know, those are both negative right in terms of the impact that you’d expect to see on an asset values, but the mitigating factor is what I’m going to characterize as the wealth effect

Michael Langemeier: Yeah.

James Mintert: The strong balance sheets coming in the lack of leverage and the strong working capital position, um, that’s really moderated what’s taken place and prevented, uh, weakness in farmland values. Going forward, and I think this might be what our listeners are interested in, Michael, going forward these next couple of years. Let’s see if we can maybe, uh, do a little forecasting here in terms of what might take place and maybe thinking about what took place the last time we saw a downturn in farmland values.

Michael Langemeier: Yeah, I’m going to use two hands here. So on one hand, if we see a repeat of what we saw from 2014 to 2019, where we were coming off some very strong net farm income, particularly in ’12-’13, and then net farm income was relatively low there for about five, six years in a row. Uh, if you have net farm income that’s relatively low a long period of time like that, you actually see some declines in farmland value. But that’s a very important if. Uh, if you have just one or two years of net farm income being relatively low, um, you have a tendency Uh, for farmland values to be more stable. And I think that’s what people are probably anticipating right now. Uh, you know, uh, if you look at ’23, it was down a little bit, but still very strong net farm income. Even if ’24 is down a little bit, uh, if you don’t have several years in a row of lower net farm income, you’re probably not, you’re probably not looking at a decline in farmland values.

James Mintert: Yeah, I think that’s a good point. And, and going forward, you know, we’ve been talking about the, the weakness in cash flows, um, perhaps having some impact. The rise in interest rates having some impact on farmland values. What’s really mitigated that is, is the wealth effect. And that’s not going away real quick. Um, so if you look ahead to 2024, Um, you know, that could prevent us from seeing any declines in farmland values in 2024 and, and, and maybe, uh, as you point out, it’s really going to depend on what happens to those cash flows a little farther down the road.

So, uh, the other thing that, that on that chart and the follow up is this chart starts to show a little bit less concern about inflation. Beginning of the year, we consistently had over 30 percent of the people in the survey saying inflation was a bigger reason why farmland values would go up over the next five years. At the end of the year, that was down to 19%. And this month, we did ask an explicit question about consumer expectations for consumer inflation. Um, and they’ve moderated a lot. Um, on this particular survey, 46% of the people in the survey said they expect to see consumer inflation of two to 4%, 24%, zero to 2%. So, uh, add those two together and you’ve got, uh, what 70% of the people in the survey think it’ll be a little under 4%. Right?

Michael Langemeier: Yeah, that’s very, very different from when we asked this, this survey late last year and earlier this year, uh, when we asked this, this, this, when we asked this question before, um, about a year ago, over 50 percent thought inflation was going to be over 6%. This time when we asked that, we have a bucket for greater than 6%, it’s only 13%. So obviously inflation expectations have changed dramatically, uh, for the, for, uh, for these respondents.

James Mintert: Yeah, so it’s, and it’s showing up on that farmland value chart as well, in terms of the impact there. So people are expecting less support from the inflationary aspect. Uh, than they were expecting maybe a year ago. Um, and then I think, uh, looking ahead to crops that will be planted in 2024, this was our chance to ask people about what they expect to see happen. And again, I think comparing this to inflation expectations for the consumer economy are really interesting.

Um,

Michael Langemeier: Yeah, this is, this has really changed also from when we, we, we, we asked this question fairly routinely about a, about a year ago, there was a lot of pessimism, uh, regarding where input prices were going at that time, uh, and, and now just to, just to give some background, uh, to what’s going on in the ag economy. Uh, because I think what the results match that fairly well, if you look year to year changes in, in the USDA NASS input price index, it’s very flat. It’s essentially zero. You got some in inputs like fertilizer and diesel that are down, you got other inputs like wages that are up maybe six, 7%. And then you got a lot of inputs that are, that are only up slightly, but it’s very flat overall. Overall, that compares to inflation rate of about. Three, four percent. And so right now input prices are the rate of increase is lower than inflation. And that’s exactly what we saw when we asked this question of corn and soybean producers this month. Just looking at the percentage that’s either think no change or decline, we’re looking at 65 percent. Uh, either think, uh, a decline in input prices or no change. Um, you know, that’s, that’s a much different story than a year ago. And really, uh, uh, and really care, compares quite favorably, uh, to the inflation rates we were talking about.

James Mintert: Yeah, so I think that is a huge contrast there from the ag side. There’s an expectation we could see weaker, uh, input prices compared to last year. Um, by a majority, a significant majority, two thirds of the people in the survey say either flat or declining. Uh, that’s a big change compared to last year, so.

—
[00:24:21] Interest Rates

James Mintert: We also asked people about their expectations for interest rates in the upcoming year. Keep in mind, this was done in, uh, A little earlier than the Fed actually made their announcement about interest rates. So, uh, we asked people, what do you expect the U.S. prime interest rate to be one year from now? And Michael, uh, you know, we gave a series of buckets, uh, ranging from 1 to 2 percent lower, 0 to 1 percent lower, no change, 0 to 1 percent higher, 1 to 2 percent higher. Four of the buckets basically had the same answer, right? People, people don’t know. I guess is how I would look at it, right? There’s a lot of uncertainty. Um, we do have, uh, what, roughly a third of the people in the survey think interest rates are going to go down. I think 34 percent say they expect to see lower rates. Um, if you add the percentage to say no change, you’ve got 56 percent of the people in the survey. But the flip side is there’s, uh, 43 percent think that we’re going to look to see higher rates in, in 2024.

Michael Langemeier: That was the most surprising to me, because even before the Fed met, like you said, the Fed met after, uh, we, we, after the respondents had a chance, uh, to respond to this survey, even before that, they were hinting about maybe interest rates coming down, uh, next year. The fact that 43%, uh, think that the interest rates are going to either be 0 to 1 percent higher or 1 to 2 percent higher, uh, was quite interesting to me.

James Mintert: Yeah, it’s, and uh, well

Michael Langemeier: I suppose that goes back to the, we don’t know, because it’s going to depend on the economy. Even the Fed says that, you know, you can, you could paint a scenario either for lower interest rates or higher interest rates next year, and I suppose that’s what they’re picking up.

James Mintert: Yeah, and then the other question is, you know, we ask people about prime rates so that we’ve got a Kind of a standard reference point, but for a lot of folks, the interest rate they think about is what they’re going to pay at their credit institution for an operating loan. And most of those are based on prime rates, but they’re not, the margin can vary a little bit. So, um, there’s some expectations going on there with respect to what might happen to them personally. So.

Well, Michael, that kind of wraps up the results for, uh, this month’s survey. You can get the full report along with, uh, all the charts. In fact, the charts that, uh, uh, Michael and I were looking at when we were doing this podcast are available on our website, purdue.edu/agbarometer. The AgCast website, uh, which is on the Purdue Center for Commercial Agriculture site, which is purdue.edu/commercialag has the slides. Uh, that go with this, but we’ve got a full chart library sitting on the, uh, the barometer website as well.

And Michael, we’ve got the Purdue Top Farmer Conference coming up in early January. That’s on Friday, January 5th. I just want to highlight that you can attend that conference in person here in West Lafayette or these last couple of years, we’ve made it possible for you to take part online. So you don’t have to travel to West Lafayette if that’s not convenient for you. All the information on the conference is available at purdue.edu/commercialag. I encourage you to take a look at that. And, uh, we’ve got a great lineup of speakers. We’ve got Jim Bullard, who is now the Dean of the Business School here at Purdue, but previously was president of the St. Louis Federal Reserve Bank, talking about the macro economy. Brad Lubin from the University of Nebraska is going to be talking about ag policy. Scott Irwin’s coming over from the University of Illinois, going to talk about biofuels and renewable fuels, and what that’s going to mean, especially for soybeans, uh, going forward. And then Chad Hart from Iowa State University is going to do kind of a longer term outlook on corn and soybeans. And Michael, you’re going to do some survey work on agility, and so you might highlight that just a little bit.

Michael Langemeier: Yeah, we’re actually going to do a survey as part of the conference that looks at producer sentiment and strategic risk, to look how resilient you are to strategic risk, which is essentially the risk associated with major shocks, like the war in Ukraine, uh, would be one example of that, the war in Gaza would be another one, but just big disruptions like that, how did, how did your farm react to big shocks like that? And so we’re going to, that’s, that’s going to be also going to be part of the Top Farmer survey, but I just want to reiterate, we’ve really got a top notch lineup here, I mean this is your opportunity to see some people that you’re not going to be able to see at the same place, at the same time, again for a long time.

James Mintert: And the way the conference is structured there’s going to be opportunities for attendees and participants to ask questions whether you’re here in person in West Lafayette or you’re participating online. So lots of good discussion as well. So we’re looking forward to the conference Again, just go to the website. You’ll find all the details about how to register and what the agenda looks like, etc. So hope to see you on January 5th, either in person or online. So with that, I’m going to wrap it up. And thanks to my colleague, Dr. Michael Langemeyer for participating today and, uh, I want to wish everyone listening a Merry Christmas and a Happy New Year. And so on behalf of the Center for Commercial Agriculture, I’m Jim Mintert.