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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 today, James Minnert, 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 also associate director of the Center for Commercial Agriculture.

We’re going to review the results from the May 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 13th through the 17th of May.

And the index jumped up a little bit this month. It rose up to a level of 108. Last month, uh, listeners probably recall how low it was, it was at 99 in April, so we’re up not only compared to last month, we’re also up a little bit compared to last year. Last year the index was at 104, so we’re about four points higher than we were last year. If you go back a couple of years, the index was also at 99 two years ago. So I guess a couple of things there, Michael, first of all, you know, we, we saw a little bit of a uptick in the barometer this month that, you know, why would that be?

And then the second thing I kind of wonder about, and it’s some, some listeners have asked me about this in emails and at meetings over the last year or so, might there be some seasonality in this index? Is there a tendency for farmers to have a little bit of a weak outlook on the ag economy in the spring?

Michael Langemeier: It sure seems like that’s the case because if you look at the chart, uh, it seems like about the last four out of the last five, April, May, we’ve hit a low. And so there seems to be some seasonality going on there, but I think part of the increase this month, if you look under the hood was less pessimism regarding corn prices in particular. So a little bit more optimism regarding corn prices.

James Mintert: And just crop prices in general. I think, you know, we were seeing some strength in corn and soybeans. I think I pointed that out in the article this month, but also some strength in wheat prices. As you point out, I think from the Corn Belt perspective, corn was a bigger increase than what we saw in soybeans. And we’re making that comparison from when we did the survey in April to when we did the survey in May. And so that probably accounts for some of the optimism.

You know, you also wonder as you look at where we were in April versus May, we made some pretty good planning progress at the time we did the May survey, we basically had caught up to the five year average in terms of spring planning progress. I wonder sometimes that maybe might have some small influence on sentiment. As you look at it, you know, and, and try and explain, well, why did the index go up? And you kind of decompose it into the Index of Current Conditions and the Index of Future Expectations. The biggest improvement was clearly looking at the Future Expectation Index. It was up 11 points compared to April, uh, 19 points higher than a year ago. The Current Condition Index was only up six points compared to last month. And it was still below where it was this time a year ago. So, in a way, people became more optimistic about the future, which I think kind of ties in with this idea of maybe stronger prices, uh, potentially thinking about stronger returns in 2024. Do you think that’s true, Michael?

Michael Langemeier: I think that, I think the fact that the Index of Future Expectations is quite a bit above the Index of Current Conditions is, is a signal that the, that the respondents think that margins are going to be a little bit better, you know, into ’25, ’26 compared to ’24. We’ve been talking about the fact that margins look pretty tight for ’24. But if we had, if we saw some improvement in prices, like we’ve seen recently, and we get some reductions in and production costs, we I mean, certainly margins would look better, uh, in ’25 compared, compared to ’24.

We’re also going to talk about here a little bit later, uh, in, in this podcast, but I think part of this also might be related to some of the questions we asked related to solar.

James Mintert: Yeah, there could be some impact spilled over from farmland expectations, but you know, if, if you think about what would drive higher margins, uh, Michael. It seems, looking at other forecasts, looking at USDA, looking I think at, uh, FAPRI at the University of Missouri, most of those expectations would really probably need to be coming out of the cost side as opposed to the revenue side, right?

Michael Langemeier: Yeah, the prices don’t look like they’re going to increase all that much, but even with today’s prices, if you can reduce those production costs, you know, margins are certainly going to improve.

James Mintert: So the Farm Financial Performance Index was up this month. It was up to a reading of 82. That’s six points higher than a month ago. And I think also a little bit higher than, than this time last year. I think this time last year was also sitting at, uh, about 76. So about a, a six point improvement, uh, whether you look at it compared to just a month ago or a year ago. But if you look at it from a little longer term perspective, you know, it’s well below where it was at the end of last year, the index in December was at 97, November was at 95. So people are still telling us that 2024 is going to be a tough year relative to last year. Do you agree?

Michael Langemeier: Yeah, I definitely agree with that. And really the 82 is very consistent with the January, February, and March indices.

James Mintert: We asked people going back to I think beginning of last year. What are your biggest concerns for your farming operation? And they’re continue to tell us essentially the same things. Their number one concern continues to be just high input cost and number two is low output prices or lower output prices and number three interest rates. And I look at the results in recent months they really haven’t changed much, Michael.

Michael Langemeier: No, it’s a little bit surprising because we have seen a little bit of relief, uh, in terms of input costs, but, but, uh, having said that, uh, you know, input costs are certainly a very high compared to what they were prior to COVID. And I think that’s partly what’s being picked up.

James Mintert: Yeah, I think people are looking at their break evens relative to a historical norm, and their historical norm goes back farther than just these last couple of years. It does kind COVID era, um, when input costs were substantially lower across the board. Whether you’re looking at things like machinery cost, building cost, as well as some of the other key crop inputs. And I think that’s what’s bothering people, and we’ve been picking that up in our surveys really for some time.

Michael Langemeier: And I don’t think we want to de emphasize the interest rates. I mean, the interest rates obviously, the operating interest is up quite a bit compared to what it has been historically. But that also feeds into any loans you might have on machinery, buildings, land, all of those things. And so I think that’s also very important.

James Mintert: Yeah. And if you look at the interest rate responses the last three months, it has been creeping up a little bit. Um, if you look at it from the longer term perspective, since we’ve been asking this question, it’s been bouncing around from about above and below 20%. And this month it was a 22 percent of the people in the survey chose that as their number one concern. That compares to high input costs, which was chosen by 32%. Uh, lower crop and livestock prices chosen by 27%.

And again, the other factors that we ask about don’t seem to be bothering people too much. We did see a little bit of an uptick in the percentage of people choosing environmental policy is being something they’re worried about this month. It was chosen by 11 percent of the people. It’s been chosen by 11 percent before, but that is a little higher than it was the last several months. I don’t know if that’s enough to really note that as a as a notable change or not.

Michael Langemeier: It’s still so much smaller than the interest rates, costs, and prices, and so it’s hard to really tell if we’ve got a significant movement there or not.

James Mintert: Farm Capital Investment Index was up a little bit this month, up four points. That left it at a reading of 35. That’s two points below a year ago. It’s essentially equal to where it was two years ago. And then of course, I think listeners remember that in late 2020 and early 2021 the index was all the way up above 90. So people are telling us it is definitely not a great time to make large investments and you know when you look at the the breakout of the raw responses to that question, we continue to get roughly three fourths of the people to survey telling us it’s not a good time to make large investments, right?

Michael Langemeier: And really, this index has been low ever since interest rates started to climb. You know, one of the people I work with really closely pointed that out to me when they saw this chart, and that’s really the case. I mean, we really have had a quite low index, you know, ever since interest rates started to rise.

James Mintert: Yeah, that’s a good point. We continue to do the follow up question, what’s your primary reason now is a bad time to make large investments? This question only goes to people who say it’s a bad time. The thing that did jump out at me kind of reinforces what you just said, Michael. This month we saw a jump up in the percentage of people pointing to interest rates. 44 percent of the people who think it’s a bad time to make large investments attributed that number one reason to big rising interest rates. And I kind of interpret that as high interest rates or higher interest rates. Um, so that was kind of interesting. What was your take?

Michael Langemeier: Yeah, it jumped more than I thought it would. It had been hovering in that 35 to 40 percent, but it was 44 percent, like you said, this month, which is obviously pretty high. Another one that’s ranked pretty high and has been pretty high for the last several months is relatively high prices for machinery and new construction.

James Mintert: Yeah, that’s been a key factor for a long time, but we’ve seen this over time, the interest rate has become more important than the increase in prices for farm machinery new construction.

Going back to last summer, we started asking people who say it’s a good time to make large investments why they feel that way, and it’s really interesting looking at the roughly the last four or five months, how the rise in importance of high dealer inventories has really showed up in that response to that question. Back in January, I think 16 percent of the people in the survey were pointing to high dealer inventories as being a good reason to make investments. Now, among those who say it’s a good time to make investments, and keep in mind it’s only about a fourth or maybe a little less than a fourth of the people in the survey, 45 percent of them said it’s because of the rise in high dealer inventories out there. And, you know, Michael, I have to say, as you travel around the Midwest and also look at the data that comes from the Farm Machinery Manufacturers Association. Those dealer inventories are up dramatically.

Michael Langemeier: It sure seems like that when you’re, when you’re driving, driving around Indiana and, and neighboring states, that those inventories are substantially higher than what they were even a year. ago.

James Mintert: The recent announcement I think by Deere was that they were going to operate their capacities at a rate that was below dealer sales levels in an attempt to draw down those inventories, indicating how severe they thought the problem was becoming. So I think from a farmer perspective, that suggests that among those who think it’s a good time, they think they’ve got better leverage in terms of negotiating a deal. And I think that’s really showing up in the survey here.

The Short -Term Farmland Value Expectation Index was up three points. That’s a pretty small move in that index. Uh, it is five points higher than it was this time last year. You go back two years ago, it’s 30 points lower than two years ago and roughly 42 points below three years ago. So, still some optimism there. Less than we had two years ago, clearly. Less than we had three years ago. Looking at the last year or so, I’d argue it’s probably been relatively stable. It’s bouncing around a little bit, but we’re kind of hovering in that 110 to 120 range.

Michael Langemeier: And this particular index is highly correlated with the Index of Current Conditions, and the Index of Current Conditions just isn’t very strong right now.

James Mintert: Yeah. And if you look at the raw responses to the question, you can kind of see the trend here a little bit. The percentage of people who saying they expect to see higher farmland prices over the next 12 months has been drifting lower again going back to 2021. It’s about the same this month as it was this time last year. That was a 29 percent at both times. And 14 percent said that they think farmland values are headed lower. And that explains why it’s a little stronger than this time last year. We actually had, if you compare this year to last year, fewer people told us that they thought farmland values were headed lower. Um, so that’s kind of interesting. And if you look at the long term index, Michael, it’s been a while since we’ve really talked about the long term index. But, um, it’s a lot of months it doesn’t provide a lot of additional information, but it’s kind of interesting when you look at the chart, we are very very near the record high on the Long-Term Farmland Value Expectation Index. And just as a reminder to listeners, this is based on a question that asked producers what they expect to see happen with respect to farmland values over the next five years. So the index is up three points compared to April. That’s not a big move there, but if you look at it, it’s sitting at 159. The all time high is just just barely above 160. If you go back three years ago, it was sitting at 158, so we’re one point higher than we were three years ago. That’s a much different picture than what you get looking at that short term index.

Michael Langemeier: This is, this is one of the things that surprised me the most when I was summarizing the data, you know, this month. In fact, I, I double, double checked, uh, to make sure that these numbers were correct because you have fairly low margins, uh, you have flat cash rents, and you have relatively high interest rates, and we’re still, still seeing some, uh, a lot of optimism regarding long term farmland values, and so this, this is rather intriguing.

James Mintert: And again, you know, if you look at why the index was as strong as it was, looking at the raw responses, 69% of the people in the survey said they think farmland values are headed higher over the next five years. A year ago that was sitting at 58%. Uh, a year ago. 16% of the people in the survey said they thought farmland values had had lower. This month, that was down to 10, so you can kind of, I mean, that that tells the story as to why we’re sitting at very close to record high on this index. Um, let’s see if we can dig back, dig into the survey a little deeper and see if we can ascertain what what people are thinking about here.

So again, if you think on the survey responses, if you think that farmland values are going to head higher over the next five years, you get a follow up question and ask you what is the main reason you expect farmland values to rise. And the responses are pretty consistent. Um, you know, we consistently get a majority of people telling us that they think non farm investor demand is going to drive farmland values higher. This month that was at 55%. But the interesting thing is, uh, at least from my perspective, these last couple of months, we changed the response categories a little bit. We added a response category and that response category was energy production from things like solar and wind energy. And in April was the first time we included that 8 percent of the people who think farmland values are headed higher said it was because of energy production. This month it was 12%. And Michael, I guess, you know, we put it in there because we thought there was something going on here. And it looks like we’re picking it up in the survey.

Michael Langemeier: This is a really really interesting chart. These charts will be available, available for people to look at. I encourage you to take a closer look at these reasons why people expect farmland values to increase. Because really the top three, non-farm investor demand, inflation,energy production are real outside of production agriculture fundamentals. And I was going back to, you know, saying that, you know, cash flows aren’t very strong, interest rates are relatively high, and we’re picking it up with this. Those aren’t marked, uh, as being very important, uh, reasons for, to expect farmland values to increase. And so, and so, you know, just to summarize, things happening outside of agriculture that are important to agriculture are really driving, uh, expectations right now.

James Mintert: Yeah that’s interesting, that’s a good way to put it. I’m glad you kind of stated it that way, that’s a good way to summarize those three things. Three things outside of what we tend to focus on as ag economists. We tend to think, you know, cash flows from crop production for example are driving it, and people are telling us there’s other factors that they think are really driving those longer term values.

So, to follow up on that, you know, we’ve been asking people about have you had some discussions about contracting to produce solar energy on farmland? We’ve also, these last couple of months, been asking people, have you been engaged in discussions about carbon capture, utilization, and storage? And this month we’ve rephrased that slightly and just said carbon capture and storage.

On this month’s survey, 20 percent of the people in the survey said that they’d had a discussion about solar energy leasing in the last six months. And that’s essentially the same percentage we got in April. In April, It was I think 19. So you average across those two basically 20 across those two months The month before that I think it was a 12 and the month before that, Michael, I think it was at eight percent. So we’re picking up an increase in activity in solar energy, at least discussions, which is interesting. And then on the carbon capture side, the way the question was phrased this month was it focused on carbon capture and storage from an ethanol plant, and we were really trying to focus, make it a little more clear as to what we were talking about there, because there’s been an increase in interest on the part of ethanol plants to engage in carbon capture and storage to improve their carbon scoring, essentially.

So, 7 percent of the people in the survey said they’d had a discussion about carbon capture and storage. And that implies, you know, the only people that were likely to respond that way were ones who were within some reasonable proximity of an ethanol plant, which is clearly a subset of our, of our survey respondents. So what do you make of all this, Michael?

Michael Langemeier: I really didn’t, I really didn’t know what the percentage would be in terms of carbon capture, utilization, and storage. We’ve heard people talk about this, and that’s why we put the question in there. And so, I think we need to ask this one several more times before we really get a feel for that. But 7%, that seems pretty high, you know, given what you, the qualifier, the qualifiers you just suggested. You’ve got to be relatively close to an ethanol plant in order for that to work. But one of the things that really stuck out the last couple months is that 20 percent have actually had discussions related to solar.

And again, just remind the listener, this is the entire U. S., this is not just Eastern Corn Belt where there’s been a lot of activity. And so that’s just a really large number.

James Mintert: And it’s also a good point to kind of remind listeners of how this survey is conducted. We know we survey 400 people every month. I just want to reiterate, they are not the same 400 people. Um, so we have a big data bank of, of names that we draw from that meet our stratification qualifications. So when we got 20 percent this month, those, none of the people in this month’s survey were in the prior month’s survey. In fact, if you’re in the survey this month, you should not be in the survey for at least another year.

So the fact that we’re picking up 20%, two months in a row like this, is starting to, Well, it’s catching my eye. I’ll put it that way. Last month when we saw the 19 percent we kind of scratched our heads and wondered, you know, could that be an anomaly in the survey? But when we do it two months in a row and come back with almost the same percentage, that’s when I think you and I probably have a lot more confidence, right?

Michael Langemeier: Yes, definitely.

James Mintert: And, you know, if you look at it over time, we’ve been asking about solar going all the way back to June of ’21. And so some, some for perspective there, the first, uh, what four times we asked the question, we were getting responses between six and 11 percent of the people in the survey said they had had a discussion about solar energy leasing. Um, it certainly looking like we’re seeing a significant uptick here in 2024. February was 10%. March was 12. April was 19. May was 20. We’re going to ask it again in June and just kind of monitor this in terms of what’s going on there. The one change we did make in 2024 is we qualified it and ask people to tell us about discussions that have taken place in the last six months because we wanted to keep it on a more contemporaneous basis. And not necessarily pick up questions or discussions took place two and three years ago.

So, we continue to follow up and ask people about the rates that are offered, particularly for solar. 55 percent of the people in this month’s survey said they were offered $1,000 an acre or more for the long term production period of the contract. 28 percent of the survey said it was 1000 up to 1250, 27 percent said 1250 or more, so that’s the upper end, and we’re still picking up some low rates, we’re picking up some people who say they were offered less than 500, that is declining. This month, the less than 500 per acre group was only 12 percent of the respondents who’d had a discussion, if you go back to 2021, it was roughly a third, 32%.

So we’re clearly seeing a shift away from the lower rates being offered towards higher rates being offered. And again, I think that correlates pretty well with the 20 percent having those discussions. When the rates get up there, uh, people get interested.

Michael Langemeier: Yes, and when there’s more interest, when there’s more interest and more people know about it, you have to offer, you have to offer higher rates.

James Mintert: So one of the questions I’ve had from, uh, some, some reporters in particular has been, uh, you know, is the, is the change attributable to more farmers interested in solar leasing, or is it attributable to an increased demand for solar energy production? And when I look at it, Michael, I say it’s demand.

Michael Langemeier: I think it’s demand.

James Mintert: It clearly is because we’re seeing this increase in people being willing to talk about it, which is a supply component And at the same time prices are going up. That intake indicates to be the demand curve is shifting out.

Michael Langemeier: And farmers are just more familiar with others that have talked to people about leases and so, and so as this, as this progresses, even though they, they’re not supposed to discuss rates among farms. You know, people hear about rates and and and so you and you get more information and and uh, and so I think I think because of the higher demand, farmers a little bit more aware of what the what the rate the current rates are Uh, you’re just you’re just gonna have to have to have higher rates in order to encourage more land to come in go into the solar.

James Mintert: And we’re gonna continue to survey on this, in fact I think on our next survey, Michael, I’m going to encourage us, I think we need to have another bucket, uh, on the upper end, because we’re, we have heard some individual reports of rates that are substantially higher than 1250. Uh, those are so far, well, we don’t know.

Michael Langemeier: Yeah, we don’t know.

James Mintert: I, I think they’re isolated, but I don’t actually know, so I think we’re going to ask more, to try and ascertain, learn a little bit more about that.

When we do the follow up among this. Now, this question only goes to people who say they’ve had a discussion, 1/4th of the people, 26 percent who say they’ve had a discussion, say that either they or one of their landowners have signed a contract to lease some of their farmland for installation of solar energy, and that percentage is up from what it was the first few times we asked this, Michael. So again, we’re picking up more discussions taking place. We’re picking up more people having signed a contract, right?

Michael Langemeier: Yeah, and this is not only going to impact land values. One of the things that comes to mind when I keep looking at, looking at some of these charts related to solar. What is the cash rent market going to look like next fall? And so we’ll have to make sure we ask, we ask, uh, detailed questions next fall about cash rents for ’25 and how energy might be impacting those because, you know, you take certain areas, certain areas of the country and, uh, you, you have several, if you have several solar projects in a fairly small geographical region, that’s got to increase the demand uh, for cash rent in that area. It just has to.

James Mintert: Yeah, that’s an interesting question. Um, I’m not going to disagree with you on that. My own expectation is it probably has more impact on farmland values than cash rent.

Michael Langemeier: Yeah, I, I would agree with that.

James Mintert: Okay.

Michael Langemeier: Yeah.

James Mintert: Our listeners are shocked that two ag economists would agree with each other, but nevertheless, that would be my own view. That would probably have a bigger impact on farmland values than it would on cash rental rates. Um, so, for the first time, we asked a question about what people were being offered for carbon capture and storage from these ethanol plants. And this is based on limited data. I’m kind of cautioning. Uh, we don’t know a lot here, but I’m going to tell you what we found out. And then I’m going to tell you that we’re going to ask it again, uh, repeatedly to try and learn more about this, but the rates are quite variable. Uh, roughly half the people that said they were offered a rate, they know, or they engaged in enough of a discussion that a rate was offered, said they were offered less than $26 per acre. 15 percent were in the 26 to 50 per acre range. And a third, 33%, were offered more than $50 per acre. We’re going to rephrase the question this next time around to try and gather a little better information. But I think we, we maybe, the one thing we do know is that the rates are quite variable. Would you agree with that, Michael?

Michael Langemeier: Definitely, and it kind of reminds me of the early days of the solar. Uh, the rates were all over the board, and so I think this, people are still feeling their way with regard to these payments, and some of these were really low. I mean, less than $5 an acre, a few of these, and all the way up to a hundred or more, and so there’s a very wide range right now.

James Mintert: And some of that could be related to whether or not people understood the question correctly, right? Because we’ve had some difficulty with respect to differentiating carbon payments for, for example, the practices where you in row crop production versus getting payments for somebody who’s actually going to pipe in carbon and try and bury it deep into the ground.

And I’m not sure that everybody that responded to the question really understood what we were trying to ask. We were really focused on asking people about, um, the carbon being piped in and being stored deep in the ground. And that’s, we might need to think about how to phrase the question.

Michael Langemeier: I think this is new enough that there might have been some confusion there. And so one of the things we can do there is continue to ask the question and try to improve how we ask it. But continue to ask the question and see if we can get a little better information.

James Mintert: My own feel is that some of the really low rates were probably not focused on what we’re talking about.

Michael Langemeier: No. ’cause they don’t, they just don’t seem reasonable.

James Mintert: Yeah, so, but again, I think, you know, using economist language here, I think it’s a market that’s probably in search of an equilibrium.

Michael Langemeier: Yeah. That’s a good way to put it.

James Mintert: And That’s indicative of a market where not much information is available, because if, if you get the phone call, uh, or the email or the text message that says, we’d like to talk to you about possible carbon capture and storage on your farm, um, you, there’s no external source for information that would tell you, well, what, what is the typical payment for that?

And the analogy I would use there is, for example, in oil and gas, you know, there’s a pretty standard lease rate, which usually starts at one eighth, or roughly twelve and a half percent. And negotiate maybe above and beyond that sometimes, but you at least have some idea as to what the equilibrium rate is. And this market, I think people are kind of scrambling and trying to figure out what that, what that base rate might be.

Michael Langemeier: It reminds me of the early days of the hog finishing contracts. I know that’s 25, 30 years ago, but that’s what it reminds me, there just wasn’t rates out there. And so you really didn’t know if it was a good rate you’re being offered or not. And that’s one of the reasons we’re going to continue to ask this is, is try to provide a little bit more information on, on the rates that are being offered.

James Mintert: Yeah, so I think for listeners, the, the message is stay tuned. We hope to have better information going forward, but this was our first pass at that particular one.

So that wraps up our discussion for this month. You can get the full report on our website, purdue.edu/agbarometer, and of course the charts are included in the, in the report. We have a complete chart library available on the website. You can actually look at some of the charts that we didn’t include in the report that, uh, cause we ask lots of questions that we don’t necessarily talk about in the report every month. And obviously you can listen to the podcast on a routine basis. And if you’re not a subscriber, if you’re listening on the website, you can subscribe on, uh, any of the major podcast providers just search for Purdue Commercial AgCast on the podcast provider and you’ll find it. So. With that, I want to thank my colleague, Dr. Michael Langemeier for joining us. And on behalf of the Center for Commercial Agriculture, I’m Jim Mintert. Thanks.