AGRICULTURE CONFIDENCE INDEX™

 

Ag Confidence Index Results

Farmers View of Ag Economy Turns Pessimistic


By Katie Micik
DTN Markets Editor
January 5, 2015

OMAHA (DTN) -- Farmers are ready to put 2014 in the books and move on, according to the latest results of the DTN/The Progressive Farmer Agriculture Confidence Index.

The post-harvest reading of the Agriculture Confidence Index came in at 103.4. That's a turnaround from the pessimistic pre-harvest reading of 99.8, but it's also the lowest December index value since DTN began conducting the survey in 2010.

An index value of 100 is considered neutral with higher values indicating optimism and lower values reflecting pessimism. DTN surveyed 500 farmers and ranchers across the country between November 20 and December 4. DTN conducts the survey before planting, before harvest and after harvest each year to gauge farmers' attitude at key times of the crop cycle.

Farmers' evaluation of their current situation -- haggling on inputs prices without gaining ground and cutting off just about all capital expenditures -- is the lowest it has been in the survey's history. Yet expectations for the year ahead have improved substantially.

The survey asks farmers about current conditions and expectations about future conditions. Responses showed an erosion of optimism about the present since last spring, but growing hopes that next year will be better.

"During the summer months, commodity prices were in a free fall with no bottom in sight," said Robert Hill, an economist and owner of consulting firm Caledonia Solutions. "Now those prices have bounced back during the late fall, and even though current prices are not very different from late-summer levels, they are heading in the right direction and that can put a smile on any farmer's face."

Chris Hurt, an agriculture economist at Purdue University, said grain prices are recalibrating from boom-era price norms to a new, lower level now that supply has caught up to and exceeded demand.

"I'm not sure a lot of producers accept that," he said. "They saw prices drop in early October, and they are viewing it as: 'We will come back. We will have those margins again.' I see that kind of optimism particularly here in the Eastern Corn Belt where we had just fantastic yields and a lot of bushels to sell."

Strategically, optimism isn't necessarily a bad thing, Hurt said. The markets may be on the verge of defining this era's new prices, but it will make a big difference if the average corn price is closer to $4.25 per bushel or $4.75 to $5 per bushel. The lower prices go, the more farmers will have to focus on cutting costs without losing yields.

"Most farm families can adjust over three or four years and be fine," he said. "But they have to get out of their boom mentality and get back to their tight margin mentality."

INPUT PRICES PINCH MIDWEST FARMERS
DTN breaks the Agriculture Confidence Index down by sector and regions. Crop producers in all regions (the Midwest, Southwest and Southeast) have a slightly positive outlook with an index value of 101.9, an improvement from August's 96.3 reading.

Livestock producers are more confident than their row crop brethren, the Ag Confidence Index shows. At 106.4, the latest reading is down from last August on a more pessimistic view of what the year ahead holds. Prices for livestock are down from their record highs, hog and broiler production is expanding, and concerns about comparatively high retail beef prices have helped reign in hopes.

Midwest farmers are the most pessimistic overall with an index value of 97.7, which is up from the pre-harvest reading of 92.

"Midwest growers are currently having a tough time working things out with their input suppliers," Hill said. Forty percent of the farmers DTN surveyed said current input prices are bad, while another 39% say they're normal.

Jim Lankford, who grows row crops and raises beef cattle in Martinsville, Ind., told DTN that input prices "just keep going up, up, up. They've just gone out of sight" compared to where they were 10 years ago.

Yes, fuel prices are down at the gas station, he said, but the crude oil collapse hasn't done much to help diesel prices. Seed and chemical costs are steady with last year in his area, as are cash rents. 

"With inputs, I don't have a lot of control over price but at least I have some. I can prepay. I can go to a different supplier or product," he said. He's been watching prices, but he's not convinced they'll go lower anytime soon.

DTN's survey data shows that 49% think input prices will stay the same while 31% expect them to get worse and 22% expect them to improve. While the overall outlook is still dim, it's an improvement from August, when 38% thought prices would get worse and only 14% thought they'd get better.

"We've seen big iron companies cutting way back on their production lines," Hill said. "Now, they and the variable input manufacturers in seeds and chemicals are further trimming costs, including cutting corporate staff. The input industry is feeling the Midwest growers' pain."

Hurt said someone will eventually have to cut their price if farm revenues don't rebound. It's kind of like a game of chicken, and all of the input suppliers are waiting to see who "can hold on to their prices and margins the longest, and who can't. Who is going to blink and say, I'm going to cut prices because I don't want to give up market share?"
AGRIBUSINESSES FEEL FARMERS'S PAIN
The DTN/The Progressive Farmer Agribusiness Confidence Index, at 105.5, is down less than a point from August, as hopes for a better business environment a year down the road balanced out concerns about present sales and profitability.

"Given what the growers are feeling, it's not surprising that local agribusinesses are also down on their current situation, not only compared to this summer but also compared to the same time last year," Hill said. "Their current sales are off slightly, and their profits are way down compared to earlier this year and at the same time last year. This is evidence that farmers are pinching their pennies and striking lower value deals with their suppliers."

Equipment manufacturers and dealers have been the first to feel the pinch, although Hurt notes they've changed the business model since the 1980s farm crisis. Instead of filling dealers' lots with inventory, they've moved to just-in-time manufacturing to fill orders. That's insulated them from some of the fallout, he said.

Hill said it makes sense that agribusiness's outlook would brighten up as they "see some of the downward pressure on the financial prospects of their customers easing up. It's not all smelling like roses, but the free fall seems to have stopped and turned up somewhat."

INCOME, CASH RENT ONGOING STRUGGLES
Lankford told DTN he doesn't think this year hurt farmers in his area too badly, but there's a lot of uneasiness about next year. "We've had two pretty good crop years in a row, and they think we'll be down a little bit next year" on yield, he said. He thinks farm incomes in his area could fall by about a third due lower prices and a smaller crop.

A majority of producers that DTN polled ranked their current farm income as good or normal, at 30% and 41% respectively, while 29% said their income was poor. In a shift from the pre-harvest survey, nearly half of the farmers see their income staying the same. Fewer think it will get worse.

"This adjustment is nothing new," Hurt said. "Just get your playbook out from 1998 to 2005. We averaged $2.04 per bushel for the national corn price for those eight years. How did you make it? You relied on the government program."

Hurt said the Agricultural Risk Coverage (ARC) farm program is likely to provide solid income protection for farmers in its first two years. "With our high yields in Indiana this year, the ARC program kicks in around $4 per bushel and protects down to $3.50 U.S. average price. Next year that will be up to $4.30 a bushel on corn with average yields and protects down to $3.80. That's a lot of protection."

Another strategy farmers can pull from that old playbook is to focus on earning basis appreciation and picking up what the market gives you instead of trying to hit market homeruns.

Cash rents are as sticky as input prices in the near term, he said, but farmers ought to start that conversation with their landowners now. "Even if you don't get them down much for the 2015 crop, you're setting up the opportunity to be more serious about bringing them down for the 2016 crop."

Hurt thinks the sooner farmers start cutting costs, increasing efficiency and marketing strategically, the better off they'll be.

"These are all good management practices," he said. If you do these things and the market goes up, "it doesn't prohibit you from having even better times. Well managed farms will benefit if we have a more bullish upside."

Katie Micik can be reached at Katie.micik@dtn.com. You can follower her on Twitter @KatieMDTN.