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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 Jim Mintert, Director of the Purdue Center for Commercial Agriculture, and joining me today is my colleague, Dr. Michael Langemeier, who’s the Associate Director of the Center and also Professor of Ag Economics here at Purdue.

We’re going to review the results from the July 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 July.

And Michael, the Ag Economy Barometer index rose eight points to 113. That was a surprise. I certainly wasn’t expecting a rise in the barometer this month. That still leaves the index, though, down 10 points compared to a year ago, so it’s not as positive as you might think at first glance.

The bigger surprise, I guess, was both of the sub indices, the Index of Current Conditions and the Index of Future expectations, were up. The Current Condition Index up 10 points compared to last month, future expectations up 7 points compared to June. Both of them, though, are still lower than a year ago, especially the current condition index. It’s 21 points lower than a year ago. Future expectations, I think, was down 5 points compared to a year ago. So, Michael, I already said, I’m sur I was surprised. Were you surprised?

Michael Langemeier: I was definitely surprised, particularly with the Index of Current Conditions. Uh, and when you look at corn and soybeans, for example, and you And you, uh, project net returns for corn and soybeans in 2024. I think this could be one of the worst years in terms of net returns since 2007.

I mean, we had some pretty, pretty low net return years from 2014 to 2019, but it, it’s gonna, it’s gonna hang right with some of those low years from 2014 to 2019. And, and about 55% of the, of the people surveyed are primarily corn and soybeans. And so, yes, I was surprised.

James Mintert: So I think it’s important to remember that although the Current Condition Index was up in July versus June, maybe the more relevant comparison is to a year ago, and it was 21 points below a year ago, so maybe that’s a little better comparison when you look at it that way.

And then I think, you know, the other thing to think about, Michael, is the week we conducted the survey. It was the 15th through the 19th of July. That coincided With the Republican National Convention that took place in Milwaukee. And we’ve seen this in the past in 2016. Following the 2016 election when Trump was elected, we saw a big jump in sentiment. Um, in 2020, when Trump lost, uh, we saw things move the opposite direction. Uh, what we didn’t do this month, this is where we got caught a little bit flat footed, we have in the past asked some policy related questions to learn more about why people’s sentiment might have changed other than economics, um, and some of those things that people focused on in the past were the change in the regulatory environment, change in taxation, uh, even change in trade policy. We didn’t ask those questions this month, so we can’t delve into that, but when we looked at the results, I think both of us thought that, uh, the political environment might have had an influence on sentiment. We’ve got evidence in the past that things other than economic variables can influence sentiment, and I think this might be a case where that actually happened.

Michael Langemeier: Yeah, I think that definitely makes sense because, you know, elections do matter when it comes to policy direction.

James Mintert: So, when we ask people about their biggest concerns for the upcoming year, no big changes. The number one issue continues to be high input cost. Um, number two, though, is lower crop and livestock prices, or the risk of lower crop and livestock prices. That was chosen by 29 percent of the people in the survey as their top concern, or one of their top concerns. Higher input cost chosen by 34 percent of the people in the survey.

Again, when you make the comparison this month to a year ago, you can kind of see the change in perspective. A year ago, only 19 percent of the people in the survey said, lower crop and livestock prices was the top concern. This month it was 29 percent. So you can kind of see that year to year change High input cost not much change compared to a year ago people worried about a year ago. They’re still worried about it, right?

Michael Langemeier: Yeah, it’s been pretty it’s been pretty flat about a third of the people are very concerned about high input costs.

James Mintert: And then the other one that has changed which we’ll talk about this a little more later is the concerns about rising interest rates. That did decline this month. It was chosen by 17 percent of the people in the survey. Again, you compare it to this time last year, it was chosen by roughly one out of four, 24%. That’s consistent with Fed announcements, right? The Fed’s been kind of leaning towards this idea that interest rates are going to maybe have peaked and maybe would come down. I think people in our survey are kind of buying into that, right?

Michael Langemeier: I think that’s definitely the case. And even if they don’t come down until later this year, it certainly would be a relief for a very capital intensive industry.

James Mintert: And the way we phrase the question, or at least the response, is asking them about rising interest rates.

Michael Langemeier: Yes.

James Mintert: And I think the message has been pretty clear that we’ve probably peaked with respect to interest rates. The big question is how rapidly and when they might start coming down. So,

Um, the Farm Financial Performance Index was maybe a little bit of a dose of reality here with respect to what people think is taking place financially. That did come down this month. It went to 81 from a reading at 85 last month. And reverse is a, what was a two month streak of the index actually going up. This was not a surprise, right? I mean, maybe the magnitude, maybe I, I might’ve actually expected even sharper drop than what we saw.

Michael Langemeier: I thought it would be too. I mean, we were at 76 back in April, I believe it was. And I thought maybe it would drop down to, to what we were in April. Uh, but, but to be fair here, I mean, it’s been in a pretty tight band here with it, with the exception of April, that was at 76. We’ve been right at from 80 to 85 since January.

James Mintert: The other way of looking at it is compare this month to a year ago.

Michael Langemeier: Yes.

James Mintert: And it is lower than this time last year. Last year the index I think was at 87. So we’re six points lower than last year. Again, a little bit like we talked about with respect to the Index of Current Conditions and Index of Future Expectations That year to year comparison might be the more relevant here as opposed to going back to June.

Farm Capital Investment Index, I think rose six points compared to a month ago. But again, it was still lower than this time last year. This time last year, that index was at 45. This month’s reading is at 38. So, we continue to have a weak environment for farm capital investments. If you look at it on a chart, for about the last two years, it’s primarily floated between, on the low end, about 30. Uh, 30 or 31 is the low. And the upper end it’s, it’s climbed above 40 a few times, but basically that range is a 30 to 40. And if you go back, uh, what three years ago, we were at 50, uh, three and a half years ago, we were above 90. And I think that tells the story. People don’t think it’s a great time to make investments.

Michael Langemeier: Yeah, I think three things are very important when you’re thinking about farm capital investments. One is we’re looking at a fairly weak cash flow in 2024. That’s certainly not positive. Uh, the other thing, though, is we talked about earlier the fact that interest rates have peaked might be a little, it’s positive for this farm capital investment index. And so we’ll see if that has an impact, uh, moving forward. If we see some decline in interest rates, maybe there’ll be a little bit more interest, uh, in capital investments. But another point I want to make, we bought quite a bit of machinery. Uh, in ’21, ’22 and ’23 when we had some pretty good cash flows. And so there may not be quite as much need, uh, to replace the equipment as there was, uh, maybe, maybe in ’21 and ’22.

James Mintert: Yeah, there’s a cycle and clearly, you know, coming off of those down years and that roughly ’14, ’15, uh, up through about 2019, people held back on making those investments. When we had the positive years, they jumped on it and made, made some significant investments. Um, so I think that clearly is a factor. Um, I, just kind of supporting the idea that the interest rates are, are less of an issue. You know, when we ask people about, uh, among those on the survey who said it was a bad time to make investments, um, fewer of them are pointing to interest rates as a, as a concern.

Um, you know, as you look at it, I think rising interest rates in May and June was chosen by over 40 percent of the people in the survey as a reason why it’s a bad time. This month it was only chosen by 28%. So, I think that kind of points to the idea that interest rates backing off or at least no concern about it going up anymore is really kind of a change.

And then the flip side, when we ask people who think it’s a good time to make large investments, They’re pointing to high dealer inventories, right? And boy, you can really see it as you drive around the countryside and look at those inventories at all the major manufacturers, dealerships. Those inventories are clearly burgeoning, and it’s a big difference compared to what we saw roughly three years ago, right?

Michael Langemeier: That’s definitely the case. When we look at the variable strong cash flows, it comes in at 25 percent for people that think this is a good time to make large investments, which are a little surprised. I mean, it must be strong liquidity is probably what’s going on there. They still have fairly strong liquidity. But that’s down substantially from a year ago, where 40 percent of the people said that strong cash flows were a reason why they were making investments. So there’s quite a bit of difference from ’23 to ’24. When you look at the attractiveness of making large investments.

James Mintert: Yeah, and I think for people in the industry, you know, if you’re in that, that’s that sector of the industry. This does not bode well for sales year end, for example, uh, and spilling over into 2025. I think it’s a time when people recognize we’re in for a belt tightening, uh, and following some very strong investment years that that they can tolerate that another.

Michael Langemeier: Another question, we don’t have it on the slide here, but another question we’ve been asked in the last several months is, you typically buy used or new machinery, and the used machinery has been running well over 50%. And so even those that have, some of those people that do have cash flow, have liquidity, they might choose to look at used machinery rather than new machinery.

James Mintert: Yeah, good point.

So each month we ask people about their farmland value expectations, both on a short term and a longer term basis. Um, the Short Term Index actually went up a little, but I have to say, put a little emphasis on the word little. It was only up three points, which wouldn’t be very significant. Um, it is lower than a year ago, seven points lower than a year ago. And so again, when you look at it on a chart, you can see roughly a three year trend here, where there’s less confidence among people who think that farmland values are going up. The index is still positive. It’s above 100. That means more people in the survey expect to see farmland values rise over the next 12 months than decline. But there’s a lot less confidence expressed in those, uh, responses than what we were seeing previously, right?

Michael Langemeier: Yes, and I want to go back to when we were actually below 100. It’s been, it was in late 2020. So right, right, right at the heart of COVID there, uh, we were below 100 in terms of the Short Term Farmland Value Expectation Index. We’ve been above 100 ever since.

James Mintert: Yeah, good point. And when you look at, you know, why did the index do what it did? Um, more producers said that they expect values to be about the same a year from now. That was the big shift, right?

We had fewer people say they expect to see values go up. We had fewer people say they expect to see values go down. Both of those groups shifted a little bit over to the about the same category. Which from my perspective, Michael, is a little bit like saying I’m uncertain, right? Uh, so I think what we’re really starting to pick up is uncertainty about the direction of farmland values more so than what we were picking up previously.

Michael Langemeier: Yeah. And sometimes when you’re uncertain, uh, and you know, the, the market’s been fairly flat here for the last year. Sometimes if you’re uncertain, you say, well, it’s just, it’s just going to stay the same. It’s going to stay relatively stable.

James Mintert: The Long Term Index came down, and that’s the second month in a row that index has come down. Last month I thought part of that was just the fact that the previous month it had been unexpectedly positive. In fact, it was almost record high. But now we’ve got two months in a row where it’s down. It’s at 146. That puts it a little bit lower than this time last year. This time last year we were at 151, so we’re down five points compared to last year. Um, if you draw a trend line, I suppose, over the last roughly a couple of years, it’s kind of a little bit of a flat line in the ballpark of that 150 mark. So people are always a little more positive about the long term outlook with respect to farmland. Um, you know, what do you make of this one, Michael?

Michael Langemeier: Yeah, they’re still relatively positive for farmland five years from now. That’s the way I would say it. I mean, we’ve seen a little bit of weakness in the short term index, but this index, it’s been fairly flat in terms of those, uh, the percent that think that we’re going to have higher farmland values. And so, I still think that that’s a signal that long term, uh, you know, folks think that there’s some profitability in this industry, and I’m in that camp myself.

James Mintert: Yeah, if you look at the responses to the question, not the index, where you drop out that middle category and when you compute the index, if you look at the responses to the question, you can kind of see what’s going on a little more clearly. A couple of months ago, almost 70 percent of the people in the survey, I think it was 69 percent of the people in the survey, said that they thought farmland values were going up over the next five years. That dropped back last month, it dropped again this month to 57%. And that’s what really swung the index, right?

So again, I think we’re picking up less confidence that value is going to go up. They haven’t all switched over to negative. But they’re just less confident of future increases, and that’s just a little bit of a sentiment change with respect to farmland values.

The other thing about farmland values, no surprise, month after month when we ask people who think values are going to go up, why do they feel that way, they continue to point to non farm investor demand. But the interesting thing that’s been showing up on recent surveys now, this is the fourth month in a row, we are getting some people continuing to point to the impact of energy demand Uh, namely solar and wind, uh, and maybe even carbon, for that matter, with respect to what’s going on with land values. This month I think 6 percent of the people who think values are going to go up over the next 5 years pointed to energy demand. Uh, a month ago it was 10%, 2 months ago it was 12%. We didn’t have any expectations when we started including that as a response, what the numbers would be, but I guess considering this is a nationwide survey, I still think that’s a lot.

Michael Langemeier: Yeah, I do too. And, and then the important part about, about, uh, you know, land values is important to keep in mind here. If you go back to 21 and 22, Almost all of the factors you think about when you think about land markets were positive, meaning that they were signaling land prices were going up. Now, the way I would summarize it, it’s more mixed.

We’ve got lower cash flow. We’ve got, we’ve got relatively higher interest rates compared to what we had in ’21 and ’22. But we’ve got things like, like energy and, and carbon that, that’s, that’s positive. We still have, we still have inflation that’s higher than it, uh, than, than the long term average. And so that’s positive. And so, so it’s a mixture of, of positive and negative factors. And so I don’t want to paint a picture here that they were not that were that that negative on land values because we’re not. It’s it’s kind of a mixed picture right now. And that’s why that’s why the stable makes a lot of sense to me.

James Mintert: Yeah. So the other question we ask, um, We tend to do it this time of year, and we’ll probably do it again a couple more times. We ask people what they think is going to happen to cash rental rates for farmland in their area in 2025, in comparison to what happened in 2024. Roughly 7 out of 10, 72 percent of the people say they expect to see no change in cash rental rates. And then the other two categories are about the same. I think lower was 13%. Higher was 15%. I’d have to say, coming into this Michael, I probably would’ve expected a little more people forecasting, some reductions in cash rent, given what we’re given, what we’re talking about with respect to how tough a year ’24 is gonna be.

Michael Langemeier: I would’ve too, because I wanna go back to ’23. I mean, ’23 was not terrible, but it was certainly a lot worse than ’21 and ’22. Um, and, and it was closer to the long run average. And so ’23 was not terrific. ’24 does not look very good. And so I thought we’d see a little more weakness and and and sometimes what has to happen for the market to adjust downward is to have two years in a row that are not very good. And so I’m not saying this is necessarily going to happen. I want to qualify that because it’s pretty early to be thinking about ’25 net returns. But if ’25 net returns turned out to be not very good, just like ’24, then I think we would see some weakness in cash rents. But until that time, we’re probably looking at fairly stable cash rents.

And that’s what the survey is telling us.

James Mintert: Yeah, and I think the corollary to that, Michael, is the fact that even though we’re looking at some tough times here in 2024, the vast majority of producers entered 2024 with a very strong working capital. And that spells a lot of competition for farmland. And we’ve been through this before. In fact, we did some workshops from ever talking about, uh, how much you could afford to pay for cash rent and looking at it from an option perspective. Um, we’re probably entering that kind of an environment again, right?

Michael Langemeier: Yes. It’s not for everybody, but one of the, one of the leasing arrangements you might want to look at in today’s environment is a flexible cash rent. And what the flexible cash rent does, that’s an advantage over the fixed cash rent, is typically the base rent is set under the market, maybe 90 percent of the market cash rent. And so you have that, you have that lower rent. But if Do turn out to be really good, uh, you, the, the landlord gets a bonus, uh, and so, and so, in this environment, I think that, I think that leasing arrangement makes sense, uh, to take a close look at. Like I said, it’s not for everybody, it’s more complicated than the other, than other types of leasing arrangements, uh, but in this current environment, it does make some sense.

James Mintert: Yeah, it’s gonna be interesting to see how that shakes out, but I think looking at the survey results and then thinking about where people are at with respect to, um, their working capital, uh, there’s still gonna be a lot of competition for farmland.

So that wraps up our results, Michael. You can get the full report available on our website, which is purdue.edu/agbarometer. The podcast slide deck that Michael and I were talking about, the charts, et cetera, that’s available to download as well if you want to take a closer look at those.

On behalf of my colleague, Dr. Michael Langemeier and the Purdue Center for Commercial Agriculture, I’m Jim Mintert. Thanks for joining us.