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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 is a professor of ag economics here at Purdue and also the associate director of the center.

We’re going to review the results from the February 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 12th through the 16th of February.

Michael, the barometer index this month was up five points compared to a month earlier. But that still leaves the index 14 points below where it was a year ago. And if you look at why the barometer went up, it was really all about the fact that the future expectation index was up seven points compared to last month, although it was still six points lower than February of 2023. So that rise in the future expectation index is what pushed up the barometer overall. The current condition index was actually unchanged compared to last month. However, it’s down 31 points compared to last February. So I was a little bit surprised at the fact that that future expectation index went up. It wasn’t a huge increase, so I don’t want to overplay that, but what was your take?

Michael Langemeier: I, I was also very surprised at that because really, if you look at long run prices, they really didn’t change all that much from one month to the next. And so, and so given that, I thought it would be more steady.

James Mintert: Yeah, so, and I guess you could characterize it as relatively steady, given that current condition index didn’t change.

And to me, maybe the more relevant comparison is to compare it to a year ago. When you look at the barometer a year ago, sitting at 125 versus 111 month.

Michael Langemeier: Now, I do think the relationship between these sub indices makes sense. I think prices are really weak right now as, as we all know, particularly for, for corn, soybeans. Uh, but they do look a little better, uh, if you look at fall prices and, and, and, and a year from now prices. And so I think that, that’s, that’s consistent with my expectations.

James Mintert: Another way of saying that is to think that people think that what’s taking place here this winter is maybe an aberration and things aren’t quite that bad from a long run perspective.

The Farm Financial Performance Index came in at 84. That’s virtually unchanged compared to last month, down one point, last month it was 85. Um, if you compare it to a year ago, it’s down two points. I actually think the better comparison, Michael, is to go back to December when that reading was at 97. Clearly in, in the fall, late fall, people were feeling better about their farm’s financial performance in the upcoming year than they have been since we’ve turned the corner into 2024.

Michael Langemeier: Yeah, that’s definitely the case. But this question’s also a little hard to interpret as we cross the first of the year because they, you, you change years, you change the, the, the comparisons of the years, you’re, you’re, you’re looking at. And so when you’re looking at late ’23, they’re still comparing it to ’22, which is a really good year. Uh, now in ’24 we compared to ’23, which was good, but not quite as good. And so I think that also complicates it a little bit.

James Mintert: Yeah, the way the question is worded, it asks people to look ahead the next 12 months. So it kind of rolls forward. But you’re right. When you cross the line, people start flipping between ’23 versus ’22 and ’24 versus ’23. But I, you know, as I look at it, I think it makes a lot of sense, but, uh, with respect to people expect ’24 to be a worse year than ’23. And that’s, that’s largely. largely consistent with what we think as well.

We continue to ask this question. We started a little over a year ago, looking ahead to next year. What are your biggest concerns for your farming operation? And it has shifted some over time Higher input cost has been the top choice ever since we started asking the question at the beginning of 2023 This month chosen by 34 of the people in the survey. But the change has really come about with respect to the larger percentage of people who are now choosing lower crop and or livestock prices is a big concern. A year ago, only 18 percent of the people in the survey chose that. This month that was up to 28%. That’s as high as it’s been. Uh, and, and I think reflects the weakness we’ve seen in prices and to some extent maybe reflects a little bit of a return to what I’d call normality, where traditionally we always worry about lower crop and livestock prices being a risk, and I think that’s starting to show up in the survey.

Rising interest rates was more important a year ago than it is right now, according to producers. A year ago, 24 percent of them chose that as one of their top concerns. This month it was down to 18%. So maybe a little less concern there. Not too much change on the other things we asked about, environmental policy, farm policy, and availability of inputs.

So, as you look at it, Michael, what do you think for the upcoming year? What’s your choice, if you were filling out this survey?

Michael Langemeier: I actually think lower crop or livestock prices would be the bucket I would choose right now. Input costs are a little bit lower, particularly given with fertilizer prices being lower than they were a year ago, and so I think I would choose that bucket. When you look at rising interest rates, interest rates are still relatively high but it doesn’t look like they’re going to continue to rise. And so I think that’s partly how they’re answering that question. Uh, you know, that, that what interest rates are gonna be more stable are expected to be relatively stable as we move through ’24, and maybe even some possible declines, uh, as we get into later ’24.

James Mintert: Yeah, we could spend a whole podcast talking about the interest rate scenario, but that’s the, but, you know, when I look at the first two, the fact that people are choosing higher input cost, and then lower crop and livestock prices as their top two concerns, what I really think they’re saying is they’re worried about a cost price squeeze.

Michael Langemeier: Yeah, net margins being much, much lower.

James Mintert: Yeah, I mean, we’ve seen fertilizer come down. We’ve seen some softness in fuel prices, although they tend to bounce around a lot. But, but the other inputs have not come down. And so, you know, as you look at your budgets, for example, you’re still looking at break evens for what, for corn and beans?

Michael Langemeier: Corn, on average productivity soil, is still $5.25, so well above where the prices are currently, and the price, price, the future price is next fall. Uh, soybeans is, it’s a little bit better, but there’s still, the break evens are still, uh, above, uh, expected prices. The break even’s still above $12 for soybeans, and so, and so, and so, very tight margins.

James Mintert: And even on the high productivity soils, your break even on corn is what? Hovering around 5?

Michael Langemeier: It’s like $4.90 still up there, close to $5.

James Mintert: Hovering $5. I think that’s what people are worried about. It’s really that combination of high input prices and lower crop and livestock prices is what’s got people concerned going forward.

The Farm Capital Investment Index, no big surprise, it was a little bit softer, uh, down one point compared to a month ago. It’s nine points lower than it was this time last year. Um, again, if you go back three years ago, that index was very positive, 88. But ever since then, it’s been drifting lower or sideways. And over the last roughly two years, it’s mostly been sideways with some downward drift here recently. Um, are you surprised at all at that one?

Michael Langemeier: No, it was relatively flat, just like the Index of Current Conditions. Those two tend to move, tend to move, uh, together.

James Mintert: So, we followed up and we’ve been asking now for some time, if people say it’s a bad time to make large investments. We ask, you know, why they feel that way. And that question is showing some change. If you go back to October, only 7 percent of the people in the survey said it was a bad time to make large investments because of uncertainty about profitability. This month, that tripled. It’s up to 22%. And it’s been climbing these last couple of months. So that wasn’t a one month jump. But it’s been trending up. So again, I think people are worried about profitability. The other two factors still dominated. Um, you know, rising interest rates was the number one choice at 38 percent in terms of concerns about why you might not want to make large investments. 29 percent said it was the increase in prices for farm machinery and new construction.

But I think that that shift in the percentage of people pointing to profitability as a concern, um, That could, that could spell some soft times for farmers shooting demand in the upcoming year or so.

Michael Langemeier: Yeah, I definitely think so. And I think that will continue to rise as we continue to ask this question. It was a head scratcher to me that less than 10% thought that uncertainability that farm profitability was a major concern back in October and November. That was a head scratcher to me but there’s no surprise that that continues to rise.

James Mintert: Yeah, so for some perspective on this, going back to the beginning of 2023, um, the percentage of people choosing uncertainty about profitability is kind of fluctuated. As Michael just indicated, 7 percent was the lowest reading we ever got. That was October ’23. The high end, though, was 13%. And that occurred a couple of different times throughout the year. So what’s, what’s significant here these last couple of months, it’s really starting to come up as people are really starting to worry about that.

When we asked people about their expectations for farmland values, the short term index didn’t change at all. Uh, there was really no, no change in the responses, even when you look at the raw data as well. That index is four points lower than it was a year ago. And of course it’s well below where it was a couple of years ago. So this month’s reading was 115. Last year it was 119. Um, a couple of years ago it was at 145. So as you look at it. There’s still more people in the survey who think farmland values are going to go up in the next 12 months than think it’ll decline. But you can tell there’s a difference in the perspective. People are less confident in the aggregate that farmland values are going to continue to go up than they were in particular two years ago. Um, what’s your take?

Michael Langemeier: The factors right now, I would say a lot of them are neutral. The one that’s pretty negative is the higher interest rates. But if you look at some of the things, you look at some of the things like inflation, uh, that they’re still, they’re still higher than the 2 percent inflation out there. So I think that’s, that’s, uh, you know, lands a good inflation hedge. There’s also still interest from outside investors, uh, in the, in the land market. And so I think there is some factors that are neutral to slightly positive, you know, keeping those land values stable.

James Mintert: So I think the big positive that’s supporting it is the fact that farmers still have strong working and strong balance sheets.

Michael Langemeier: Strong liquidity, and it’s a very thin market. It only takes a few people with very strong liquidity. And so, yeah, that’s a very good point.

James Mintert: I think that picture could change a year from now.

Michael Langemeier: A year from now when the liquidity is a little tighter, that, that could change.

James Mintert: So, one of the things we’ve been asking about periodically, going back to 2021, is the payment rates being offered to people in areas where there’s an active solar leasing market for farmland. So we did make a change in the question this month. So it’s slightly different than we asked in prior months. So the question is, what is the annual payment rate per acre you are offered to lease some of your farmland for the installation of a solar energy project to generate electricity? The question only goes to people who have previously in the survey told us that they’ve engaged in some discussion. So these are people who’ve actually had a discussion with a solar leasing agent. This month we made one addition to the question, and we restricted it to people who’ve had a conversation with a company in the last six months. And the reason was, we wanted to make sure we were being pretty contemporaneous with respect to the values we were picking up, as opposed to some leasing rates that might have been offered two or three years ago. So, we did see a change. We’re going to repeat the question to see if it shows up again this way, but this month, 56 percent of the people who said they’d had a conversation in the last six months, said they were offered over $1,000 per acre. Uh, and that’s for the period that the production period of the contract, not the, uh, development or construction periods, but actually the, the, uh, period of time when the solar energy production would actually be taking place.

To put that in perspective. The last time we asked that question, which was, um, in April of ’23, 46 percent said over $1,000 an acre. And the first time we asked this question, which was in June of ’21, only 27 percent said over $1,000 an acre. And I, Michael, I have to say when I look at the numbers, this is kind of consistent with what I hear when I talk to farmers as well. Those lease rates for solar energy production have been drifting up over time, especially these last couple of years.

Michael Langemeier: And it’s pretty rare, particularly in the Eastern Corn Belt here, to hear of rates under $1,000. I haven’t heard of any recently.

James Mintert: Yeah, that’s a good point. For quite a while, there was a pretty common lease rate in that 800 to maybe 900 or 950. But yeah, you’re right. I haven’t had those kind of conversations with people lately.

On the other end of the spectrum, and keeping in mind that this is a national survey, we still have some people reporting that were offered less than $500 an acre. For our listeners, just a reminder, given the size of our survey, we don’t have the capacity to differentiate based on geographic location. We suspect that those lower rates are probably concentrated in areas outside the Corn Belt, where farmland lease rates for, uh, ag production would be lower than what we see typically here in much of the Corn Belt.

Michael Langemeier: Yeah, you take $500 in, in western Kansas, for example, that’s a really high, that’s a really high payment compared to the cash rent out there. And I don’t know how there’s a lot of activity in western Kansas or not, but just, just for example. And so you have to kind of think about what is the rate compared to the cash rent. And, you know, on the Great Plains that, that would be a very large multiple.

James Mintert: And that brings to mind maybe another way to ask this question about asking people about, at what rate they would consider in terms of signing. It’s probably

Michael Langemeier: A ratio.

James Mintert: Probably, is a ratio of what cash rents are.

Michael Langemeier: It might be hard to answer that, but that, that’s really I think what’s happening with, with some, with this huge distribution of rates.

James Mintert: And then, uh, Michael, a question that we’ve been asking every winter, uh, going back to, I think, 2019. No, actually all the way back to 2016. What is the reasonable annual growth rate expectation you have for your farm over the next five years? And the responses we get vary somewhat from year to year, but the big picture doesn’t change too much. A pretty high percentage of folks in our survey tell us they, one, have either no plans to grow in the next five years, or they plan to exit or retire the industry in the next five years. And if you add them up on this month’s survey, I think 52 percent of the farms told us they either have no plans to grow or plan to retire within the next five years. And then on the other end of the coin, or the other end of the spectrum, 31 percent of the farms are planning for annual growth rates of 5 percent or more in the next five years.

So I know you work a lot in the kind of the farm succession area, working with farm families as they try to figure out how things could work. Do these results surprise you?

Michael Langemeier: Not really. I think there is a, a rather large group that do not have a successor coming back. At least there hasn’t been one identified yet. And if, and if that’s the case, they’re probably in those first two categories. No plans to grow or plan to exit or retire. Uh, and, and so, no, it doesn’t surprise me that much. But, but to put this little, a, a little more perspective here, two thirds of the people expect to grow less than 5%. The other third is any is is anywhere from 5% to more than 15%. And so, and so some of the consolidation we’ve seen since the, uh, the started of the ethanol boom in 2007 looks like it’s gonna continue.

James Mintert: Yeah, I think our survey does point to the idea that consolidation is going to continue. Um, and you and I just got back from the Commodity Classic down in Houston and walking the floor and looking at the size of some of the equipment that, uh, the various machinery companies are putting out.

Michael Langemeier: It’s truly amazing.

James Mintert: Yeah, if you’re going to buy that machinery, you’re going to need to increase the size of your operation, right? So, uh, I don’t see this trend slowing down. Um, and our survey has been pretty consistent. It does bounce around a little bit from year to year, but when you think about the trend, uh, there’s a sizable portion of the people in our survey who say they certainly don’t plan to grow their operation.

Michael Langemeier: And one of the things, a little side note on this, I mean, you and I worked on a, worked on an article, uh, with a previous question related to farm growth, uh, relating farm growth to, to optimism in terms of the, Ag Economy Barometer. And it was no surprise that those, that, uh, I expect to grow relatively fast or more optimistic. And so I think that’s also. Uh, in, in play here. Those that are more optimistic, uh, not only they expect to grow, they probably have encouraged their younger generation to come back to the farm to a greater extent than those that are pessimistic.

James Mintert: Yeah, that’s a good point. And there’s, there’s a lot of variability in terms of those responses. But as you think about it, um, you know, one of the things to think about is we talked about this when we were at Commodity Classic, Michael, uh, thinking about your core values. Um, and if you’re thinking about what’s going to take place with your farm. And whether or not you want to pass it on to the next generation, that needs to be part of your core value, and you need to think about how you manage your operation, in terms of all the decisions you’re making, whether or not they’re consistent with that. And as we’ve worked with farms over the years, over the decades, we’ve kind of noticed some discrepancies there between what people say they want to do, uh, in terms of bringing on the next generation, versus the decisions that they make. And so, you know, one thing to think about there is, you know, the business can survive beyond the lifespan of the original proprietor. But sometimes people make decisions that aren’t consistent with that. And so as they approach what would be a retirement age, sometimes they’re making decisions that actually preclude the next generation taking over.

Michael Langemeier: All we’re saying here is succession planning really is part, part business planning. Have you, have you really done some business planning all along, rather than waiting for someone to say, well, I’d like to come back to the farm, and then you start making some decisions. In some case, that might be too late. You needed to make some decisions all along so that the farm is set up for a person to be able to join the business.

James Mintert: Yeah, I think we’ve both been involved in situations where an individual decides that they want to pass the farm on to the next generation, but they didn’t make any decisions about that until they hit age 65. And at that point, it’s somewhere between difficult and,

Michael Langemeier: Nearly impossible.

James Mintert: Nearly impossible at that stage, right? Because you haven’t made any of the appropriate decisions earlier, so.

So that wraps up our discussion for this month’s Ag Economy Barometer. You can get the full report on our website, which is purdue. edu/agbarometer. And you can also download the slides that Michael and I were kind of looking at, some of the charts while we were making this podcast. Those are available both with the podcast and on our website as well. So with that, thanks for joining us. On behalf of the Center for Commercial Agriculture and my colleague, Michael Langemeier, I’m Jim Mintert. Thanks for joining us.