Producer sentiment falls in latest Ag Economy BarometerProducer sentiment falls in latest Ag Economy Barometer
Changing perceptions about livestock sector contributes to decline.
June 7, 2016
After a surge in producer sentiment in April, spurred in part by a favorable swing in commodity prices, producer sentiment settled lower in May (Figure), according to the latest Agriculture Economy Barometer published by Purdue University and the CME Group. At a value of 97, the Ag Economy Barometer – which is based on a monthly survey of 400 agricultural producers’ sentiment and opinions regarding the health of the ag economy – was nine points lower than the April reading. The dip in the barometer during May brings the index back in line with readings provided by producers in January (98) and February (96) of this year.
An examination of the Ag Economy Barometer’s two sub-components – the Index of Current Conditions and Index of Future Expectations – indicates the majority of the shift in producer sentiment came from a downward adjustment in the Index of Current Conditions, which fell from 107 in April to 83 in May.
Increased pessimism is likely due in part to falling livestock prices, according to Jim Mintert, director of Purdue’s Center for Commercial Agriculture, professor of agricultural economics, and principal investigator for the barometer.
"Some of the decline in producer sentiment in May can likely be attributed to changing perceptions about the livestock sector," he said. "In May, just 36% of producers surveyed expected widespread good times for livestock producers over the next five years, which is a substantial drop from the 46% in April who expected good times for livestock production."
Recent declines in livestock prices, especially feeder cattle and live cattle, could help explain the decline in producers’ sentiment regarding the livestock sector. For example, June live cattle futures traded above $130/cwt. as recently as mid-March and were still above $122/cwt. in mid-April. The decline in prices continued during late-April and early May with June live cattle dipping down near $115/cwt the first week of May.
Feeder cattle futures prices followed a similar price path as live cattle futures, resulting in diminished profit prospects for both cattle feeders and cow-calf producers.
“The relatively large shift in producer sentiment regarding the livestock sector stands in contrast to the sentiment regarding the crop sector, which exhibited only a modest decline from April to May,” Mintert noted. “In short, the sentiment regarding the future for livestock producers, which had been strong, showed signs of eroding relative to expectations regarding the future for crop producers.”
Are lower farmland values on the horizon?
For the May survey, producers were also asked whether they expect farmland values to increase, decrease or remain about the same over the next 12 months. The same question was asked last November, as well as February and March of this year. Examining the results over time provides an interesting perspective into producers’ views regarding farmland, the report noted.
“The percentage of producers that expect farmland prices to increase in the next year has been quite small, but remarkably stable going back to last fall, consistently falling in a range of 13-15%. In contrast, the percentage of producers expecting farmland prices to decline over the next year has fluctuated much more,” said the report.
Producers were most pessimistic regarding farmland prices in November and March, when 46% expected a decline and noticeably less pessimistic in May when 33% of respondents reported that they expect farmland prices to decline over the next year.
“The reduction in pessimism regarding near-term farmland prices is likely attributable to the improvement in crop prices the last couple of months, said Purdue research associate David Widmar.
In a separate question, producers were asked about farmers’ profitability over the next 12 months. Only 10% reported that they expect profitability to improve in the next year. The relatively small percentage of respondents who expect improved profitability in the next year (10%) could explain why some (15%) respondents expect farmland prices to increase in the near future.
Farmland generally viewed as a favorable investment
While a small percentage of survey respondents, just 15% in May, reported that they expect farmland prices to be higher in May 2017 than a year earlier, a majority of producers still view farmland as a favorable investment. When asked to evaluate farmland as an investment on a scale of 1-9 (1 being ‘extremely poor’ and 9 being ‘extremely good’), 52% of respondents scored farmland favorably (e.g., reported a score greater than 5) and nearly one-quarter of survey respondents provided a neutral rating (e.g., score equal to 5) for farmland as an investment. Conversely, 23% of the farmers viewed farmland as a poor investment (e.g., reported a score below 5).
“While it might seem paradoxical that a majority of farmers continue to view farmland as a good investment when so few producers expect farmland values to increase over the next 12 months, it’s likely attributable to the time horizon,” the report noted. “Although most farmers do not view the short-run prospects for farmland prices favorably, their long-run perspective continues to be relatively positive.”
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