Slight Increase in Producer Sentiment Despite Rising Costs, Lower Crop Prices

The Purdue University/CME Group Ag Economy Barometer farmer sentiment index rose 6 points in July to a reading of 103. Producers were somewhat more optimistic about both current and future economic conditions on their farms when compared to June. The Index of Current Conditions rose 10 points to a reading of 109 and the Index of Future Expectations rose 4 points to a reading of 100. Although all three indices rose this month, they were still 23-24% lower than a year earlier. The Ag Economy Barometer is calculated each month from 400 U.S. agricultural producers' responses to a telephone survey. This month's survey was conducted between July 11-15.

Even though there was a slight uptick in sentiment this month, there is still a tremendous amount of uncertainty in the agricultural economy. Key commodity prices, including wheat, corn and soybeans, all weakened during this month and producers remain concerned over rising input prices and input availability. Farm operators in this month's survey voiced concerns about several key issues affecting their operation: higher input prices (42% of respondents), lower crop prices (19% of respondents), rising interest rates (17% of respondents), and availability of inputs (15% of respondents).

The Farm Financial Performance Index which is primarily reflective of income expectations for the current year, improved 5 points to a reading of 88 in June. However, this month 49% of respondents said they expect their farm to be worse off financially a year from now, which compares to 51% who felt that way in June. This is a markedly more pessimistic outlook than producers provided a year ago when just 30% of respondents said they expect their financial condition to worsen in the upcoming year.

Producers remain uncertain over their expectations for crop input prices over the next 12 months. In July, 18% of crop producers said they expect 2023's crop input prices to decline between 1 and 10% when compared to 2022's prices, versus 12% who felt that way in June. Meanwhile, 26% of respondents in July said they expect 2023's prices to rise by 10% or more, compared to 38% who expected a crop input price rise of that magnitude in June.

The rise in input costs is leading some producers to reassess their cropping plans for the upcoming year. In this month's survey, nearly one out of four (24%) crop producers said that as a result of the rise in input costs they plan to change their farm's crop mix in 2023. In a follow-up question, over half (53%) of respondents who said they plan to change their mix will increase the percentage of their cropland devoted to soybeans. In a separate set of questions, 26% of producers who told us they planted winter wheat last year said they plan to increase their wheat acreage this fall.

The Farm Capital Investment Index remains near its record low, up one point to a reading of 36 in July. To shed light on why, respondents who said now is a bad time for large investments were asked for the primary reason they felt that way. Of those respondents, 44% indicated an "increase in prices for farm machinery and new construction," 15% said "uncertainty about farm profitability," and 14% chose "rising interest rates" as the primary reason they viewed now as a bad time for large investments. Somewhat surprisingly, only 7% of respondents chose "tight farm machinery inventories at dealers" as their primary reason for responding negatively to the investment question.

Producers' views on farmland values diverged this month as the Short-Term Farmland Value Index declined 9 points to 127, while the long-term index rose 9 points to 150. The short-term index is down 20% from its peak reading in 2021, while the long-term index is only 6% lower than the peak reached last year. Short-term there was a shift away from expectations that farmland values will go higher, with more producers in July expecting values to remain about the same.

The long-term change was attributable to more respondents this month expecting values to rise with fewer expecting a decline over the next five years. The short-run and long-term farmland indices don't always move in tandem, but the magnitude of this month's divergence between the short and long-term indices is unusual. Producers who expect values to rise over the upcoming 5 years continue to say that non-farmer investor demand and inflation are the two primary reasons they expect values to rise.

Forty-two percent of corn and soybean producers in the June survey said they expect cash rental rates to rise in 2023, down from 52% of respondents who said they were looking for rates to rise in the July survey. The magnitude of the rental rate increase expected by those respondents who think rates will rise is smaller than revealed in the June survey suggesting that weaker commodity prices and high input costs could hold back rental rate increases. Among those respondents expecting rental rates to rise, 23% expect an increase of less than 5% and 34% expect the rate increase to exceed 10%. In June, 18% expected a rental rate increase of less than 5%, while 42% said they thought rates would rise by more than 10%.

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