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

We’re going to review the results from the August 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 August. And Michael the barometer fell 13 points this month and that left the index down I think 15 points compared to last August and actually from my perspective, you know, this is sort of a correction because last month I think we were both surprised the fact that the index actually rose. Now we’ve come back to earth, I guess is kind of how I look at it. And with that reading of 100, that strikes me as sort of significant because if we think about how the barometer is constructed, the first six months of data that we collected, which was the fourth quarter of 2015 and the first quarter of 2016, is the base period for the barometer.

And if you average the values over that time frame, you come up with an index value of 100. So that kind of tells me farmers are thinking that things are a little bit similar in terms of financial conditions and overall conditions as they were in late ’15, 2016. Which you and I remember well because that was the early days of a downturn for the U.S. farm economy, right?

Michael Langemeier: Yes, it, it, it’s a little bit of deja vu going on here and, and, and certainly it does remind me of that period ’14 into ’15 when prices were declining. And you were still dealing with some relatively high break even prices, uh, in ’14.

 

[00:02:02] Current Conditions & Future Expectations Indices

James Mintert: So if you look at the Index of Current Conditions and the Index of Future Expectations, they also dropped pretty sharply. Current conditions, I think fell 17 points compared to last month, was 25 points lower than a year ago. Future Expectation Index, I think, down 11 points compared to July. And I think also down 11 points compared to a year ago. So again, I think both of those were kind of in correction mode because both of those increased last month.

Michael Langemeier: Yeah, and that 83, just to put that in perspective, there’s maybe been a few times, um, you know, since 2016, you know, back in ’14 and ’15, there was quite a few months where the index was this low, but since ’16, there’s only been like 3 or 4 times where the index has been this low. And this is the second time in 2024, uh, where the index has been this low. I think the other time was April.

And so we’re in pretty low index territory here. And one of the things I want the listener to, to, to keep in mind here, uh, when this index is low or relatively low. That also means that the, the financial performance index and the short term land price index are also low. They’re very closely related, uh, the Index of Current Conditions, Financial Performance Index, and the Short Term Land Index.

James Mintert: Yeah, and to be clear, they’re, those are based on different questions, but what you’re saying is they’re highly correlated. Yes. Because we’ve looked at that over the course of, we’ve been collecting data now since the fall of 2015.

And you know, if you think about it, Those previous lows on that Current Condition Index, you know, a couple of those were during the COVID area era. And from our perspective, this is much different when you go back, uh, to 2015-2016, that was about weakness in the U.S. farm economy. The COVID era was about this tremendous amount of uncertainty, not just about the farm economy, but about everything.

And so I think the comparison for us is really thinking about 2015-2016 and whether or not this is a harbinger of what’s ahead with respect to a multi year downturn because when you look at that 2015-2016 era and move forward across roughly four years, that was a significant downturn. Uh, we saw, uh, for example, a downturn in land, farmland prices, right?

Michael Langemeier: Both cash rents and land values were, were down, uh, from ’14 to ’19 and, and so yeah, the, the natural question to ask here is this going to be another one of those, five-six year periods where we’re seeing, we’re going to see some fairly low returns.

James Mintert: And I think our survey responses are telling us that people, at least some people in the survey…

Michael Langemeier: Are worried about it.

James Mintert: are concerned about it.

[00:04:35] Biggest Concern

James Mintert: We’ve been asking this question about what are your biggest concerns from your farming operation going back, I think, to the beginning of last year. And we are seeing a change. It’s a multi month change, but the thing that’s happened here is more people are pointing to lower crop and livestock prices as their top concern. This month, that was chosen by 30 percent of the people in the survey.

The top concern continues to be high input costs, but that really hasn’t changed over time. It was chosen by 33%. The relationship between that lower crop and livestock prices and higher input costs, that’s the narrowest that gap has been since we’ve been collecting data.

I mean, for example, a year ago. Only 20 percent of the people in the survey chose lower crop and livestock prices as their top concern. This month it’s up to 30%, almost eclipsing, uh, coming very close to eclipsing that higher input cost.

Michael Langemeier: And this question does a really good job of, of helping explain why that Index of Current Conditions is so low.

When we had high input costs for quite a while, coming out of ’22, uh, we had stronger crop prices. They weren’t great necessarily in ’23, but they were stronger than they are today. Uh, now we’re seeing both of those concerns. Obviously, that’s a double edged sword. You’ve got low net returns because of low prices and high input costs.

Uh, on this chart, the, the, uh, interest rates, has declined a little bit, and I think what’s going on there, we had a question related to interest rates this month, is, is I think producers are seeing that we could see some cuts, uh, in the near term with interest rates. They’re still relatively high compared to what they were 3 -4 years ago, but there is hope in sight.

James Mintert: Yeah, if I remember right, Michael, I think, uh, a little over two -thirds of the people in the survey said they look for interest rates to decline over the course of the next year. And that’s reflected here. I think 17 percent of the people said rising interest rates is still a concern, but a year ago it was at 24%. So, we are seeing a shift there. Fewer people worried about the interest rate environment. More people worried about prices for what they sell. Uh, and a continuing or ongoing concern about high input costs.

[00:06:39] Farm Financial Performance Index

James Mintert: You mentioned this earlier, Michael. The, you kind of gave a lead in here, the Farm Financial Performance Index down sharply this month to a reading of 72. That’s down from 81 last month. And it also means that index is down 14 points compared to a year ago. And if you look at it, that’s one of the weakest readings we’ve got on the chart for that Farm Financial Performance Index. Right?

Michael Langemeier: I think this is the reason it’s been historically, we didn’t ask this question too much before 2021. And so we don’t have as long a history on this question as we have on some of them. So I think this is the low end on this question. What makes this question rather difficult to interpret compared to some other questions is we’re always comparing ’24 to ’23, you know, ’23 to ’22. And so it’s always a, a pairwise comparison, but nevertheless, this is a very low reading. Telling us that they’re very worried about ’24, uh, you know, being substantially lower, uh, net returns than ’23. And if we remember right, U.S. net farm income was down, was down quite a bit in ’23.

James Mintert: Yeah, although by historical standards It was still high. Yes, ’23 was not a bad year by historical standards. I think that gets lost in the shuffle sometime, but people are clearly expecting a much worse year in ’24. And I think we’re picking up evidence that they’re worried about what ’25 is going to look like, right?

 

[00:07:59] Farm Capital Investments

James Mintert: Farm Capital Investment Index down 7 points compared to a month ago, 6 points lower than a year ago. It’s a reading of 31. That reading is tied for the all time lowest investment index reading we’ve had. We’ve had that reading of 31 several times. We’ve never gone below that. But um, I’m not going to say that’s as low as it can get, but it’s certainly pretty negative, right?

Michael Langemeier: Yeah, certainly, and one of the things we have to keep in mind when we’re looking at this particular question is approximately 20 percent of the surveys is beef cow producers or cattle producers. They’re looking at some fairly good times right now, and so there is an element, there is a group that are surveyed, that are looking at fairly strong returns compared to the other 80 percent. And, and I, we don’t know this for a fact, but I think that’s helping this index stay a little higher than it would be, would be otherwise.

James Mintert: Yeah, that’s a good point, uh…

Michael Langemeier: And that’s, It’s pretty sobering when you start to think about that.

James Mintert: We have a tendency I think sometimes to talk about all the results relative to what’s going on in the corn and soybean complex because a majority of respondents every month do have a corn or soybean enterprise. But you’re right, we do have some distinctions there, especially on the beef cow side.

When we do the follow up and ask people who say it’s a bad time for making investments, we ask them why. More respondents this month are pointing to high cost as a reason to hold back on investments. I think this month that was chosen by 39 percent of the people in the survey. Last month that was 36. The month before that, back in June, it was 26%. So we’ve got a bit of a trend going on there and we are picking up more people saying that it’s a concern or about the uncertainty about farm profitability. I think this month that was chosen by 24 percent of the people in the survey. Last month it was 19 percent. The month before that it was 18%. You go back to May, it was 16%. So people clearly, as we progress through ’24, are more and more worried about farm profitability, and that’s one of the reasons they’re thinking about holding back on investments.

Michael Langemeier: Yeah, that’s very true, and when you look at, we’ll look at the, uh, possible responses here, there is a couple of those where we could see some, we could see some relief, a little bit of relief from interest rates, for example. If interest rates decline a little bit, they’re still relatively high, but that should help a little bit. Also, uh, there’s no reason, uh, no reason to suggest that farm machinery and new construction has to continue to increase. Uh, you know, if it, if it, if it’s, if it’s stabilized a little bit, maybe even comes down a little bit, maybe that will help a little bit. And so I don’t want to be too pessimistic here, but because there is a couple of factors here that, that look like they’re, they’re switching a little bit, uh, to more positive.

James Mintert: Yeah, I don’t. I don’t…

Michael Langemeier: Probably reading too much into the tea leaves there.

James Mintert: Yeah, I don’t think I agree with you. I think, uh, and I think the machinery companies are kind of expressing that as well.

Michael Langemeier: Yeah, yeah. It is bad. It is bad.

James Mintert: The buildup of inventories is pretty large.

So we do ask people who think it’s a good time to make large investments. What, what the reason for that is, and I guess the first thing I want to point out is only 11 percent of respondents said it’s a good time to invest. We haven’t been asking this question that long. I think it is tied for the lowest percentage that’s ever recorded that. Um, and, but among those who think it’s a good time to invest high dealer inventories was cited as the top reason. And, and you can certainly see that whether you’re looking at the AEM, Ag Equipment Manufacturers, data or just looking at what’s going on in dealer lots around the Midwest.

Michael Langemeier: Now I’m going to use my other economic hand, and there is a factor here that I’m a little bit pessimistic about. And if we go back to February, we asked the farm growth question. And every time we ask that, we ask that every February, there’s about 50 percent of the farms that are going to grow. When you look at this, only 9 percent say that this is a good time to invest because they’re expanding. That tells me that there’s a lot of people can expand with very little new machinery.

James Mintert: Yeah, which would imply they simply don’t need to make a capital investment.

Michael Langemeier: They simply don’t need to make a capital investment.

James Mintert: Yeah, good point.

 

[00:12:07] Farmland Expectations

James Mintert: Uh, the farmland outlook this month did shift. We saw a downturn in both the Short -Term and the Long -Term Farmland Expectation Indexes.

Short term index reading at 105 was down 13 points below a month ago, 21 points lower than a year ago. Again, last month’s rise in this index was, I think, a bit of an anomaly. Uh, but if you look at it, it’s a continuation of the weakening in expectations for farmland values.

And then when you look at the raw responses, that, that was probably the most interesting thing here, Michael. Uh, 24 percent of the people, in the surveys that said that they think farmland values could go down in the next 12 months. Um, that’s a jump of 11 points compared to last month. Last month it was at 13 percent of the respondents, this month 24.

Michael Langemeier: And a bunch of those, bunch of those responses switched from about the same to lower farmland prices. And so that kind of tells me that the winds are changing here a little bit.

James Mintert: Could be a reflection of tightening of working capital, for example.

Michael Langemeier: Yes, definitely.

James Mintert: That’s been one of the reasons why we think farmland values have been as strong as they have been, is the fact that working capital was quite ample on many, many farms. With the tightening of returns in 2024, I think when people do the year end calculations, they’re going to discover they’ve used up some of that working capital, right?

Michael Langemeier: I think so, yeah.

James Mintert: Long term index was down as well. Uh, third month in a row that long term index was down. It was only down four points compared to July, but that did leave the index down nine points compared to a year ago.

And to me, I think the bigger thing there is the fact that it’s down three months in a row. That’s kind of unusual with this long term index.

Michael Langemeier: And it’s pretty big. Uh, if you, if you go back to April, if I’m looking at the chart, right, it was about 160, uh, you know, 158, 159, 160, and now it’s 142. That’s a pretty large drop.

James Mintert: Yeah, and we’ve been this low before, but it’s been a while. If you go back to early 2023, we saw some readings down below 140. Uh, but it is a shift, and again, I think the three month pattern here is probably, uh, the bigger significance, because it’s, you know, historically, the long term index is always more positive than the, than the, uh, uh, short term index.

And even when you looked at the raw responses here, we saw an uptick in the percentage of people who say they think farmland values could fall, not only over the next 12 months, but over the next 5 years. Let’s see, I think that went to 14 percent this month, up from 11 percent in July. I think the highest that’s ever been was at 19%, and that was back in early 2023.

You and I were talking about that before we started recording. You know, one of the things we think was going on there was people realized prices were starting to soften, but break evens were not coming down very fast and people were very worried about that. I think this could be longer term than that.

Michael Langemeier: I definitely think so.

James Mintert: And of course, we keep asking people, what’s the, if you think farmland values are going to go up, why do you think so? Well, they continue to point to the same thing. They continue to point to non-farm investor demand. But underneath that, I think one of the things that’s interesting, we’ve asked this question now five months in a row, and there’s a significant portion of people who think that what’s going on with respect to using farmland to generate renewable energy, uh, is going to support farmland values. These last two months, that’s been at 6 percent of the people who think farmland is going to go up. We had a couple of months there in May and June when it was between 10 and 12 percent. First time we asked it back in, I think, April was at maybe 8 percent. So we’ve got a kind of a range there between 6 and maybe 12 percent of the people in the survey who think value is going to go up, think it’s because of what’s taking place with respect to energy production. What’s your take on that?

Michael Langemeier: I think that’s very real, and it’s one of the, you know, there’s a mix here of positive and negative factors. It’s certainly one of the positive factors, with, along with perhaps non farm investor demand and, and inflation. Uh, you look at cash flows and interest rates and some other fundamentals, they’re, they’re negative right now, uh, with respect to the farmland market.

James Mintert: Yeah, good point.

 

[00:16:17] Cash Rents Expectations

James Mintert: So, our kind of our wrap up question this month, Michael, is, uh, what do you expect to see for cash rents on farmland? And this only went to people who produce crops. So people who raise corn, soybeans, wheat, and cotton, uh, received this question. And we’ve asked it two months in a row. So I’ve got more confidence in the results now, because we got very, very similar results two months in a row. This month, 70 percent of the people in the survey said that they think cash rents will stay about the same in 2025 versus 2024. Last month, it was 72%. Um, we did pick up a few more people who said that they think we could see some lower cash rents on this month’s survey. This month it was 16%. A month ago it was 13%.

But, you know, I think you got to look at these results and say, on average, people think we’re going to see cash rents probably pretty flat in 2025.

Michael Langemeier: Yeah, I’m glad we asked this a second time, because I was wondering if the July results were not what we would expect, meaning that I thought perhaps there’d be more people that thought cash rents were going to be lower. Well, we talked about this before. It does take, it does take two or three years in a row of low net returns for cash rents to come down. Cash rents are very sticky. They don’t move near as much as net return to land. And so what this tells me is there’s going to be, start some tough conversations in the fall of ’24 for ’25 cash rents, but there could be even tougher negotiations in the fall of 2025 for 2026 cash rents.

James Mintert: Yeah, looking at these results and looking at the research that you’ve done over the years on the relationship between net returns to land and cash rent, my best guess is we’re not going to see much movement in cash rent for 2025. But we will see some significant downward pressure in ’25 for the ’26 crop year if ’25 unfolds the way it looks now, right?

Michael Langemeier: Something has to give and, uh, uh, you know, and I’ve talked about this before, but if you look at the costs that are relatively high now compared to what they were in 2014, if we’re, if we think we might be repeating that, that, that, uh, that 2014 to 2019 period, one of those is cash rent. Uh, the other ones are related to interest rates. We’re getting some relief in interest rates. And so, it’s just one of the costs that, uh, that we’re, that, that’s probably going to have to change a little bit if we, if we stay in this low net return environment.

James Mintert: And, you know, at the risk of relying on economic theory for a bit here, Michael, I think, you know, we would kind of expect that because theory would suggest that the input factor with the most inelastic supply is going to be the one that actually absorbs the biggest change or shock. And we’ve seen that in the past, I think we’ll see it again.

Michael Langemeier: And that, we’re gonna, we’re gonna see, we’re gonna see some of the same thing we talked about with machinery. People are gonna hold off buying machinery for some of the same reasons. They have some flexibility when they buy that, and the same is true with land.

James Mintert: So that wraps up the highlights for this month’s survey. You can get the full report on our website, which is purdue.edu/agbarometer. And of course, you’re welcome to listen to our podcast anytime. We cover not only this topic, with respect to the Ag Economy Barometer but a variety of farm management related topics on the podcast Purdue Commercial AgCast. It’s available in all the major podcast providers and at our website. You can watch it and listen to it on our website or you can do it with your favorite podcast provider. If you do that, you’ll want to search for Purdue Commercial Ag Cast to find the podcast on any of the major podcast providers.

And so with that, I want to thank my colleague, Dr. Michael Langemeier for joining us today. And on behalf of the Center for Commercial Agriculture, I’m Jim Mintert. Thanks for joining us.