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Audio Transcript

James Mintert: Welcome to Purdue Commercial AgCast, the Purdue University Center for Commercial Agriculture’s podcast featuring farm management news and information. I’m your host, James Mintert, director of the Purdue Center for Commercial Agriculture, and joining me today is my colleague, Dr. Michael Langemeier, who’s a professor of ag economics and also the associate director of the Center for Commercial Agriculture.

We’re going to review the results from the January 2024 Purdue University/CME Group Ag Economy Barometer Survey of farmers from across the nation. Each month, we survey 400 farmers across the U. S. to learn more about their perspectives on the ag economy. This month’s Ag Barometer Survey was conducted from the 15th through the 19th of January.

[00:00:47] Current Conditions & Future Expectations
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James Mintert: Michael, the Ag Economy Barometer fell 8 points in January compared to December. And that left the index 24 points below a year ago. If you look under the hood and, and try and see what’s going on with respect to current conditions and future expectations, both of those indices fell as well. Current Condition Index was down 9 points compared to last month. Future Expectations Index was down 7 points compared to December. And both of those indices are now 23 points lower than they were a year ago. So, anyway, you slice it, Michael. Sentiment was weaker in January than it was in December. Were you surprised?

Michael Langemeier: I wasn’t that surprised because the WASDE report in January was quite bearish. And if you look at these indices, they’re all as low, or close to being as low as what they were last September. Before we started getting some positive news regarding yields. And so some of that positive news we got regarding yields in the last three months of the year, that was kind of taken away with the bearish WASDE report.

James Mintert: Yeah, I think that’s a good way to put it. We basically gave back the improvement and optimism we picked up as we headed through the fall, which I think you and I think was probably pretty heavily driven by the fact that yields were so strong. Plus, we had a little bit of a rally in commodity prices for a while. By the end of the year, we were losing that. But still, uh, you had a combination of factors last fall that made people feel a little better about what was going on. And then all of a sudden January hit and it’s kind of like getting slammed in the face with a, with a fist almost, right? With respect to weaker commodity prices and expectations for a much tougher year in 2024 than, than in 2023.

[00:02:29] Farm Financial Performance Index
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James Mintert: The Farm Financial Performance Index reading was 85. That’s down 12 points compared to December. And leaves at 8 points lower than a year ago. And again, I come back to the low point for 2023 occurred in May, and that index was down at 76, so we’re still a little stronger than that. But again, that index is basically back where it was last summer. Last summer, June, July, August, and I think September, we were at 86 and 87 on that Farm Financial Performance Index. This month at 85, we’re right back to that. We gave back the optimism we picked up during the fall. No big surprise there?

Michael Langemeier: Essentially what’s going on here is, is corn price in particular is down substantially more than the drop in input prices. Particularly with the drop in fertilizer price. And so, and so because of that, that index is down.

James Mintert: Yeah. People are worried about the cost price squeeze. Right?

Michael Langemeier: Yeah, definitely.

James Mintert: And we picked that up when we looked at our question where we’ve been asking people, what’s your biggest concerns for your farming operation in the upcoming year? We’ve seen this change kind of occurring as we headed through 2023, but it really happened on this particular survey. The top two categories are lower crop and livestock prices and higher input cost. Higher input cost has been the number one concern ever since we started asking this question in January of ’23. This month, 28 percent of the people in the survey chose that as one of their top concerns. That matched exactly the percentage of people who chose lower crop and livestock prices as one of their top concerns. So, you know, you and I are looking at a chart here, Michael. If you look at the data from January of 2023 and compare that to January of 2024, in January ’23, sixteen percent of the people in the survey said lower crop and livestock prices was a top concern. This month, that’s all the way up to 28 percent. Higher input cost a year ago was at 42 percent, choosing that as a top concern. This month, that’s dropped back to 28 percent. So, we’re kind of back to a more traditional perspective here, or at least getting closer. Do you agree that?

Michael Langemeier: that’s definitely the case. One of the things I’ve also found interesting this month is, is it might not be significantly different, but the concern about policy increased a little bit. Not only compared to a year ago, but even compared to last month. Uh, it’s still sitting, if you, you add environmental policy, foreign policy, it’s still sitting at 17 percent. That’s below prices, below input costs, below interest rates, but nevertheless, uh, there was a movement there. That’s something we’ll have to keep our eye on as we closer to the election.

James Mintert: Yeah, that’s a good point. And the biggest rise there, uh, was probably environmental policy because, again, you compare it to this time last year, only 7 percent of the people in the survey said that was a significant or top concern. This month it was at 11%. Farm policy, a year ago, was at 3%. This month it was at 6%. So, yeah, people are getting a little more worried about policy. That just could be a function of the fact that we’re in the election cycle, you think?

Michael Langemeier: And anytime you have prices decline as much as they have, people get more concerned about policy. Is the safety net going to help us?

James Mintert: The other interesting thing to monitor here is the percentage of people worrying about rising interest rates. It’s really kind of a straight line across, uh, over the last year. I mean, it’s bounced around a little bit, but a year ago, 22 percent were worried about rising interest rates. This month it’s at 20%. I’d categorize that as it’s on people’s radar, right? Interest rates are high enough that they’re paying attention.

Michael Langemeier: And it’s not going to come off the radar until we see some pretty significant declines. If we see that.

[00:06:08] Farm Capital Investment Index
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James Mintert: Farm Capital Investment Index, no surprise here, it fell 8 points below a month ago and 7 points below a year ago. So the reading is at 35. Um, that’s above the all time low. I think the all time low is at 30. But it’s getting close so people are not too optimistic about making investments and we follow up and ask people, you know, what’s your primary reason for saying now it’s a bad time to make large investments in your farm operation and keep in mind, majority of the people in the survey every month have been telling us it’s a bad time. So this is I don’t remember exactly on this month, close to 75 percent of the people in the survey, I think, said it was a bad time to make large investments. There’s a little bit of a change there. So fewer people are saying they’re worried about interest rates, although it’s still a top concern. Essentially matching the percentage of people who say it’s because of the increase in prices for farm machinery and new construction.

But the interesting thing that’s maybe could be a blip, but, you know, I guess we’re gonna have to monitor this and see how it shakes out. We had more people this month say it was uncertainty about farm profitability. This month, 17 percent of the people in the survey who say it’s a bad time to make large investments said it’s because of uncertainty about farm profitability. As recently as October, that was only 7 percent of the people in the survey saying that. If you go back a year ago, it was at 12%. Uh, you and I were talking before we started recording, you know, he’s a little concerned when you see one month’s responses. You don’t know if it’s a blip in the data or not, but it’s gonna be something to maybe monitor here going forward, right?

Michael Langemeier: Definitely. And I think uncertainty, there’s no ifs, ands, or buts about that. Uncertainty has increased. I mean, we’ve got, we’ve got a fairly tight margin squeeze. And it could be even worse than we’re predicting right now. And so, and so this is something we need to watch.

James Mintert: Yeah, I think, I mean, we’ve, we’ve picked this up in multiple ways now. People are worried about a cost price squeeze. The data, with respect to output prices and input prices, bears that out. And it’s definitely on people’s minds. They’re definitely worried about it.

[00:08:09] Farmland Value Expectations
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James Mintert: The Short-Term Farmland Value Expectation Index, which asks people what they think is going to happen to farmland values in their area in the next 12 months, was down 6 points from a month earlier. That leaves that index about 5 points lower than it was this time last year. If you look at last couple of years, going back two years ago, that index was at 142. So this month at 115 is down about 27 points compared to two years ago. You go back three years ago, the index was at 136.

If you look at the raw responses to the question, not the index itself, but actually the percentage of people who say higher farmland prices are ahead of and versus the percentage of people who say lower farmland prices are ahead. You can see a trend showing up there, can’t you, Michael? I mean, the percentages are changing and you can really see it in that chart.

Michael Langemeier: Yeah, this month, 31 percent thought we’d see higher farmland prices 12 months ahead. And there’s only other month in the last three years where we’ve had a number lower than that. I think it was May of ’23. You have to go all the way back to late 2020 to see a percentage as low as 31%.

James Mintert: Yeah, I mean, if you go back a couple of years ago, the percentage of people who said they thought farmland values was headed higher was up approaching 50%. You go back three years ago, I think it was up over, 60%. So, a big swing there. And the other number that I’ve paid attention to on this chart is the percentage of people who are saying they actually think farmland values could weaken in the upcoming year. That bottomed out recently at about 10%. Last month it was at 14%. This month it’s at 16%. I think we’re going to watch that pretty carefully and see what say.

Michael Langemeier: Yeah, that’s the, that’s the highest number we’ve seen in three years. And so yeah, definitely we need to watch that.

[00:09:59] Farm Operating Loans
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James Mintert: One of the questions that we started asking back in 2020, we’d ask this question once a year in January is really kind of a two stage question. The first one is, do you expect your farms operating loan in the upcoming year to be the same size as last year, larger than last year, or smaller than last year? This month’s survey, 15 percent of the people in the survey said they expected to have a larger operating loan.

And then the follow up question goes to those who say they expect to have a larger operating loan. And we ask them, well, why? Is it because of an increase in input cost? Is it because of an increase in the operation size? Or is it because of unpaid operating debt? So I think the first thing, Michael, is the percentage of people telling us that they have a larger operating loan this year compared to last year has shifted a little bit, right?

Michael Langemeier: Yeah, it’s definitely smaller this year at only 15 percent. And the largest percent by far is about the same. I think that was around 70 percent.

James Mintert: So then, the secondary part, and the reason I wanted to highlight that is I don’t want to get too carried away here with respect to the number of farms we’re talking about. But, among the folks who said they have a larger operating loan in the upcoming year, the number one choice there is because of an increase in input cost. The number two choice is because the farm operation has gotten larger, relative to where it was this time last year. And then the third choice is unpaid operating debt.

But the interesting thing is the percentage of people in this category who chose unpaid operating debt as a reason for carrying over or having a larger operating loan, did increase this year versus not only last year, but the year before. This year was 17 percent of those who say that they’re going to have a larger operating loan said it’s because they’re carrying over some unpaid operating debt. Last year, among that group that was carrying, that had a larger operating loan, it was only 5%. So, Michael, do you think that’s an indication of maybe some stress increasing out there?

Michael Langemeier: If it is, I think it’s a slight uptick, I mean, if you do the math here, uh, using, our survey results here, it seems like about three percent are financially stressed, meaning they have larger, uh, larger operating loans than last year and also have unpaid operating debt. That’s a still a relatively small percent, but I do think what’s going on here. You do have some farms where the liquidity is a little weaker at the end of ’23 than it was at the end of ’22. And I think that’s showing up in this survey.

James Mintert: Yeah, and the other way to keep this in perspective, I suppose, we started asking this set of questions in 2020, in January 2020. So coming out of 2019, among the group who said they had a larger operating loan, 35 percent of them in 2020 said it was because of unpaid operating debt. Roughly double what showed up on this particular survey.

Michael Langemeier: And on average, if you look at the University of Minnesota FINBIN data or, the USDA ERS data, liquidity increased rather dramatically in ’21 & ’22. It’s probably going to slip on average a little bit in ’23, but regardless. There’s still some farms out there that have relatively weak liquidity, despite the fact we’ve had two or three fairly good years.

James Mintert: Yeah, one of the interesting things you and I’ve talked about several times over the years is the fact that no matter how good the aggregate numbers are, There’s always some farm operations that are experiencing financial difficulty for a wide variety of reasons, right? So those numbers never go to zero, but still, having said that, it’s going to be interesting to watch that going forward. This could be an early indication of maybe a slight uptick in stress showing up. Is that, is that fair to say?

Michael Langemeier: I think that’s fair to say.

[00:13:43] Carbon Markets
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James Mintert: So the last thing that you and I wanted to talk about today is what’s taking place in the carbon markets. And we’ve been asking a series of questions going back to 2021, about people having contact with or discussions with firms that are offering to pay for carbon credits. And we’ve modified how we ask the questions a little bit over time. You can’t compare in a straightforward way, some of the early results to the way we’ve been asking the questions here lately. But we’ve got enough successive questions that we can start making some comparisons.

If you look at it, uh, in the very beginning, the first couple times we asked the survey questions, we only asked people who had actually signed a carbon contract what they received. And when we did that, a high percentage of people said that they got less than 10 an acre. The first time it was, 75 percent of the people who signed a contract said that. Second time we asked it, uh, a month later it was 60%. Those are small numbers of people in the survey who signed a contract, so you don’t want to get too hung up on those percentages. And then there was, among people who signed a contract, nobody said they got more than 20 an acre.

We changed the question in March of ’21 and started asking people who’d had discussions what they were offered and not requiring that they’d actually signed a contract. When we did that, we started getting a little more dispersion in the responses. But still, the dominant response was less than 10 an acre. Almost a 50/50 split, I guess, between less than 10 an acre and people being offered between 10 and 20 an acre. And then, starting in October ’21, to match more accurately the language used in the contracts that we were familiar with, instead of asking on a per acre basis, we started asking per metric ton.

It didn’t seem to make a lot of difference in the responses. That was one of the things that was kind of interesting to me, Michael, which suggests I’m not sure how this is being positioned with producers in terms of their understanding. If a lot of people just equate metric ton to per acre, it’s a a little ambiguous here. But as you look at it, the rates have remained relatively low, it looks like. When we switched to the metric ton wording, we did start to pick up more people saying that they were getting offered a rate of 20 to 30 a metric ton. I think starting in October ’21 up through this month. It was between 10 and, I think, a high point was 26%. A very small number of people who say they’ve been offered over 30 a metric ton. In fact, in the early days, nobody was being offered that. On the most recent survey this month, we had 12 percent of the people who said that they actually were offered a rate of 30 a metric ton. But the interesting thing was, compared to the last time we asked this survey question, which was on August of ’23, in August, 32% of the people in the survey said they were offered less than $10 a metric ton. In January, that was up to 61%. So my question to you, Michael, do you think that 61% reflects something new going on in this market? Or is it a blip in the data?

Michael Langemeier: That’s a good question. You wonder if there’s less interest? Perhaps by companies, uh, uh, seeking growers. I don’t know exactly what’s going on here.

James Mintert: I think what we decided after looking at the numbers was we’re going to keep asking the question to see if we get these kind of results again. It, it made me wonder, and both of us feel like we’re receiving fewer questions from producers, either individually or at meetings about carbon credits. And we’re kind of wondering if maybe we’re seeing a little bit of a shift here, but a little too early to say that that’s the case.

Michael Langemeier: Yeah and definitely one of the things if you do have someone that’s offering these contracts in your local area, try to get, look at contracts from at least two companies. And the reason why I say that is, is the dispersion in terms of the amounts being offered is wider than it’s probably ever been.

James Mintert: Yeah, that’s a good point. So just to reiterate that. In this month’s survey, among those who said they’d had a discussion, 61 percent said they were offered less than 10 a metric ton. 12 percent said they were offered between 10 and 20 a metric ton. 15 percent said they were offered between 20 and 30. And 12 percent said they were offered more than 30 a metric ton. And the first time we asked the question phrased as metric ton payments was in October of ’21. And in that survey, no one said they were offered 30 a metric ton or more.

So you’re right about the dispersion, at least based on our survey numbers, and I think that’s consistent with what we’ve picked up talking to folks as well. We’re going to continue to ask this question because I think it’s, it’s a marketplace where there’s a lack of transparency. It’s difficult to know what terms are being offered. Is it going to be per metric ton or is it going to be per acre or are you being paid per metric ton, but they talk about it in terms of acres, which I think goes on a fair amount. Just a lot to think about here. So we’re going to continue to post some questions on this topic and see if we can learn some more.

That kind of wraps up the highlights of this month’s survey. You can get the full report on our website, purdue.edu/agbarometer. And of course the podcast has always got the most details in terms of the discussion between Michael and I and that is available at purdue.edu/commercialag. So, with that, appreciate you taking time to listen to the podcast and on behalf of the Center for Commercial Agriculture and my colleague, Dr. Michael Langemeier, I’m Jim Mintert. Thanks for joining us.