Market Matters Blog

Ag Confidence Index Foreshadows Things to Come

The latest results of the DTN/The Progressive Farmer Agriculture Confidence Index highlight a very predictable trend: as commodity prices decline, crop producers feel the pinch and livestock producers become more profitable.

Some trends are bold and hard to ignore. Others are more subtle, more like foreshadow than forecast. Five simple questions make up the Ag Confidence Index survey, but the breakdown of responses from different categories of farmers (region, crop/livestock, annual sales) provides lots of food for thought. It's an intriguing exercise, but often needs the statistical disclaimer that whenever your narrow your sample size, the data's not always representative.

That said, Robert Hill, an economist at Caledonia Solutions who helped design the DTN survey, found a few pieces of data that reflect some interesting trends that go beyond the "livestock, up; crops, down" trend.

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Every ag economist these days points to projected profit margins for crops that are thinner than the past few years, and remarks that profitability will, by and large, depend on a farmer's land costs.

One piece of the data DTN collects in its survey categorizes farms by annual sales (remember my smaller sample size disclaimer). This time, it showed that farms with more than $1 million in annual sales were very pessimistic. Farms in the $500,000 to $1 million range sat at neutral. Both groups' expectations for income and input costs in the year ahead appear grim.

"We may be seeing an interesting phenomenon playing out in how land prices work their way through the market by size of farm," Hill said. "Larger operators feel the pressures of land price movements long before the smaller operators. So there is a lag effect of land prices through the market, where first it seems to be felt by the larger operators and then after some time, the effect ripples through to the smaller operators."

The second trend Hill pointed out is one that's been a long time in the making.

"The big surge in capital expenditures on farm equipment and land is behind us. We have entered a period of more rational behavior on such expenditures," Hill said. "Three main factors may explain this draw down on capital expenditures. First is the fact that the farm fleet has been substantially upgraded during the surge of the past 3 to 4 years. Second is that the tax advantages of year-end purchases are disappearing. Third is that prospects for net farm income are down from historical highs. Farmers now are entering a cycle driven more by 'replace as needed' for their equipment."

What do you think, readers? Are cash rents on your mind, and how are they going to affect your income prospects this year? Are you going to hold off on equipment purchases next year?

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Dale Reimers
3/25/2014 | 9:46 PM CDT
Katie, Your story is correct on all accounts. Larger landholders are apt to feel more immediate pain from the slimming of margins. And Equipment is wonderfully upgraded by all farms at this time. No need to spend further on Equipment for several years. Land will be very selectively purchased from now on under these low-margin propositions. Balance Sheets are strong and if a small parcel with quality fits a grower it will still sell very strong. But selectivity will dominate our grower land purchases more than it did in the $7.25 corn years. Controlling costs is a dominant concern this year.