By James Mintert and Michael Langemeier
The Ag Economy Barometer index rose to a reading of 143 compared to 141 a month earlier. The modest rise in the Ag Economy Barometer, which is based on a nationwide survey of 400 U.S. agricultural producers each month, was underpinned by a rise in the Index of Current Conditions, which rose to 138 compared to a reading of 132 a month earlier. The Index of Future Expectations was essentially unchanged with a reading of 146 in June vs. 145 in May.
The modest uptick in sentiment was surprising given the collapse in prices for key agricultural commodities. Concerns about the potential for reduced exports to China were exacerbated by improving U.S. crop conditions for both corn and soybeans, pushing yield and U.S. production expectations higher. By the time the June sentiment survey was complete, nearby corn futures were down more than 10%, nearby wheat futures prices were down 7% and nearby soybean futures were down 12%, all compared to their late May closing prices.
The small change in the Ag Economy Barometer compared to a month earlier masks the tremendous amount of uncertainty about future conditions that exists among U.S. producers. One example of the uncertainty is the change in the percentage of producers that are expecting good and bad times in U.S. agriculture over the next year. The percentage of respondents expecting good times in U.S. agriculture during the year ahead declined from 32% in May to 26% in June, suggesting an erosion in producers’ optimism. But at the same time, the percentage of producers expecting bad times declined from 54% in May to 46% in June. Similarly, when asked to look ahead five years the percentage of producers expecting good times in U.S. agriculture declined from 51% in May to 45% in June, whereas those expecting bad times actually fell from 38% in May to 31% in June. The biggest shift among respondents was away from answering “good times” or “bad times” to “neutral”, suggesting what was really taking place was a rise in uncertainty about the outlook for U.S. agriculture.
Several times throughout the year, we ask producers if they expect prices for key commodities to move higher, lower or remain unchanged over the next 12 months. Compared to earlier in the year, there was a sizable increase in the percentage of producers expecting corn, wheat, and especially soybean prices to head lower over the next 12 months on the June survey. In June, nearly 30% of respondents expected soybean prices to decline over the next year vs. 27% in April and just 15% in January. However, at the same time there was also an increase in the percentage of producers expecting higher prices. Compared to earlier in the year, the percentage of producers expecting higher soybean prices in the year ahead rose to 25% on the June survey compared to 20% in April and 18% in January.
On the April survey, 53% of producers said they expected to see July 2018 CBOT soybean futures trade below $9.50 per bushel and 45% of respondents said they expected to see July 2018 corn futures trade below $3.50 per bushel. Those expectations were met in June.
Replacement driving investments
Each month we ask producers whether now is a good or a bad time to make large farm investments. The percentage of producers indicating it’s a bad time for large farm investments has been trending lower since October 2016, falling to 60% in June compared to 67% a month earlier. However, the percentage of producers indicating it is a good time for large farm investments dropped to 26%, down slightly compared to a month earlier and 8 percentage points below its most recent peak of 34% in February 2018.
13% of respondents on the June survey indicated they plan to make a large investment on their farm this year. Over half of those respondents said it was because a building or piece of equipment needed to be replaced. Farm expansion was cited by 18% of respondents as a reason for investing and 10% said it was to reduce their tax liabilities, whereas just over one out of five respondents cited “other” as the reason for making a large investment in their farm operation this year.
Survey respondents were asked by how much their crop acreage changed in 2018 compared to 2017. More than three-fourths of the producers said there was no change in the acreage their farm is operating this year compared to last. However, 8% of respondents said the acreage they operated increased by 10% or more and 6% said their acreage increased up to 10%.
When the same question was posed with respect to planned acreage changes for 2019, 86% of respondents said they did not anticipate any change in their crop acreage. However, 3% of the producers plan a crop acreage increase of 10% or more while 6% plan to increase their crop acreage up to 10% in 2019 compared to 2018.
Flexible cash leases
Just under half (48%) of all respondents (regardless of their primary enterprise) on the June survey said they expect to rent cropland in 2019. Flexible cash rent leases have been promoted as a way for farm operations to share some risk with land owners, while also providing landowners some of the stability that comes with a cash rental agreement. Among the farm operations that indicated they rent crop land, 36% said they expect to use a flexible cash rent lease in the upcoming year. Operations that expect to use a flexible cash rent lease in the upcoming year were asked what variable is used to determine the final payment to the land owner. Choices provided on the survey were 1) price, 2) yield, 3) revenue and 4) other. The most common response was revenue with 34% of producers flexing their final rental payment based on revenue. Close behind revenue as a variable to determine the final rental payment was commodity price (28%) followed by yield (16%). Finally, 22% of respondents indicated their cropland rental arrangement would flex on something other than just revenue, price or yield.
Source: Purdue University/CME Ag Group