Trade wars and falling commodity prices are weighing on the minds of agricultural producers, according to latest Purdue University/CME Group Ag Economy Barometer reading.

Producer sentiment dropped to its lowest level since October 2016 due to concerns over worsening farm financial conditions. The September barometer reading, which is based on 400 agricultural producers from across the country, was 114, down 15 points since August.

Large declines were also seen in the barometer's two sub-indices: the Index of Future Expectations, which fell 10 points, and the Index of Current Conditions, which fell 25 points compared to their respective August readings.

"The barometer readings have been unusually volatile over the past few months," said James Mintert, the barometer's principal investigator and director of Purdue's Center for Commercial Agriculture. "Concerns about the ongoing impact of trade conflicts, and especially China's tariffs on imports of U.S. ag products, continue to reverberate throughout the U.S. agricultural sector."

Exacerbating concerns about the impact of China’s tariffs on agricultural products were unusually favorable weather conditions this summer that have led to record yields and large domestic supplies for corn and soybeans, the report noted.

“Prices for both fall-harvested crops experienced large price declines since June 1, with nearby corn futures declining 12% and nearby soybean futures declining 19%,” the results noted. “The futures price declines were accentuated by unusually negative basis values for both commodities, especially soybeans, pushing cash prices down even further.”

According to the results, producers indicated that financial conditions on their farms deteriorated significantly as 2018 unfolded; their expectations for the future also weakened. In September, 54% of farmers surveyed said their farm's financial condition was worse than a year earlier, up from 38% who felt that way in June. The September survey also indicated that 33% of producers expect their farm's financial condition to be worse a year from now, up 15 points compared to responses received to the same question in June.

Trade conflicts and tariffs continue to be a source of angst among U.S. farmers, the results showed. When asked whether they expect trade conflicts to lower their farm's net income, more than 70% of producers surveyed said they expect lower income in 2018 because of trade disruptions, with a large majority of respondents saying they expect an income decline of more than 10%.

Farmers plan to store more soybeans

Since soybeans have been one of the commodities hit hardest by China’s import tariffs, the survey asked farmers about their storage plans for the soybean crop currently being harvested. Nearly one-fifth (18%) of soybean growers said they plan to store a greater percentage of their production than usual. Among these, two-thirds said the trade conflict with China is the primary factor influencing their soybean storage decision.

Nearly two-thirds (65%) of growers said they plan to store the same percentage of their soybeans as usual. Growers planning to store the same as or more than usual this fall were asked then asked if they plan to store most of their soybeans until the trade conflict is settled. Although responses to this question were mixed, they did indicate that the trade conflict is skewing some producers’ marketing decisions, as 46% said they plan to store their soybeans until the trade conflict is settled. At the same time, 43% of soybean growers surveyed responded no to this question, and 11% of growers were uncertain about storing soybeans until the conflict is settled.

Bad time for large investments

The negative outlook was particularly noticeable when producers were asked whether now is a good time to make large investments in farm machinery and buildings for their farming operation and on next year's farmland cash rental rates. In September, 78% of respondents said it was a bad time to make large investments, and just 20% said it was a good time to invest -- the lowest combined reading on large farm investments since the barometer launched in October 2015.

Farmers also indicated that worsening farm financial conditions could weigh on farmland cash rental rates in 2019, with nearly two-thirds of farmers surveyed saying they expect to see lower cash rental rates for farmland next year.