Cautious optimism: Sunnier outlook is not yet reflected in expanded capital investment plans

WEST LAFAYETTE, Ind. — More farmers now say they expect their financial situation to improve over the next year than say they expect it to worsen — but there is a catch.

Improving financial expectations have not yet translated into stronger capital investment, said Michael Langemeier, agricultural economics professor and director of the Center for Commercial Agriculture at Purdue University.

“For the first time in more than a year, more farmers say they expect their farm to be in better financial shape a year from now than worse off. That’s a pretty significant change in the Purdue University-CME Group Ag Economy Barometer,” he said.

“But even as farmers become more optimistic about their financial prospects, they’re becoming less willing to invest in machinery and buildings.”

Expectations Improve

The Ag Economy Barometer increased again, moving from 126 in July to 135 in August. The Index of Future Expectations increased 11 points, while the Index of Current Conditions increased just one point.

And when farmers were asked about their own financial situation a year from now, 28% said they expect to be better off financially, 24% said they expect to be worse off, with the remainder saying about the same.

“That’s the first time since June of last year that the share expecting their financial situation to improve has exceeded the share expecting it to deteriorate,” Langemeier said.

“After a pretty long stretch of caution, we’re seeing some improvement in farmers’ expectations about where their businesses are headed.”

The Investment Disconnect

The Farm Financial Performance Index has been moving higher. It started the year at 90 and reached 103 in August.

“Farmers are feeling better about their financial prospects,” Langemeier said.

But the Farm Capital Investment Index went the other direction in August, dropping five points to 45.

“In other words, feeling better about farms’ financial outlook doesn’t necessarily translate into being ready to buy a new combine or put up a new building, and that distinction is very important,” Langemeier said.

“There’s a difference between saying, ‘I think my financial situation is going to improve,’ and saying, ‘I’m comfortable making a major capital investment right now.’ Farmers appear to be more comfortable with the first statement than the second.”

What’s Keeping Farmers Cautious?

There are still some pretty significant concerns weighing on producers. High input costs remain the chief issue in the August survey, with 45% of respondents selecting that item as their primary worry.

Low crop and livestock prices and rising interest rates also remain concerns.

“So, even though farmers are becoming more optimistic about the year ahead, they’re still operating in an environment where costs are high and the returns on a large investment aren’t necessarily obvious,” Langemeier said.

“And that may help explain why the improvement in sentiment hasn’t translated into stronger investment intentions.”

What To Watch Next

There is also another piece of the puzzle: The Short-Term Farmland Value Expectations Index increased eight points in August to 127.

In turn, land values are expected to remain relatively strong, but investment in machinery and buildings remains subdued — “a pretty cautious form of optimism,” Langemeier said.

“I think that’s the key takeaway from the August survey,” he said. “Farmers are becoming more optimistic about the future, but they’re not necessarily ready to act on that optimism by making large capital investments. And given that high input costs remain the No. 1 concern, that caution makes sense.

“The important thing to watch going forward is whether this improvement in financial expectations eventually shows up in capital investment.

“If it does, that would suggest farmers are moving from feeling better about the future to actually acting on that confidence.”