Breaking point: Rising costs grip ag economy

WEST LAFAYETTE, Ind. — Farmer sentiment has taken a noticeable step backward, but it is not simply that farmers have become more pessimistic about the future.

There is a growing concern about the economics of operating the farm right now. And input costs are playing a huge role in that angst.

The Purdue University-CME Group Ag Economy Barometer fell 12 points, from 135 in August to 123 in September.

The Index of Current Conditions fell 18 points — a very large drop for that index, compared with a 9-point decline in the Index of Future Expectations.

“That tells us something very important: Farmers’ assessment of their current situation deteriorated considerably more than their expectations for the future. And when we look at what’s driving that, input costs really stand out,” said Michael Langemeier, agricultural economics professor and director of the Center for Commercial Agriculture at Purdue.

A record 52% of respondents said higher input costs were their biggest concern, and 54% said high input costs were the main thing limiting improvement in their farm’s financial situation.

“So, even though commodity prices and farm incomes expectations have changed, with crop prices increasing from mid-August to mid-September, producers are looking at the cost side of the equation and seeing a pretty significant constraint,” Langemeier said.

That is also showing up in how farmers are thinking about their own finances. The Farm Financial Performance Index dropped from 103 in August to 90 in September.

“When farmers are less confident about their financial performance, it’s not surprising that they become more cautious about making investments,” Langemeier said.

The Farm Capital Investment Index fell another 6 points to 39 — relatively low for that index, though it has been ranging from about 35 to 50 for quite a few months.

“Farmers are feeling more pressure on the economics of the operation today, and that’s making them more cautious about the next 12 months,” Langemeier said.

But there is an interesting counterpoint in the data: Despite the decline in overall sentiment, the Long-Term Farmland Value Expectations Index reached a new high of 168.

“That’s a striking contrast,” Langemeier said. “Farmers are telling us that they’re concerned about current input costs and their financial performance over the next year, while at the same time they continue to have very strong expectations for farmland values over the longer term.”

The two things are not necessarily inconsistent.

“Farmland is a long-term asset, while input costs and farm margins can change very quickly. And we’ve seen that in recent years,” Langemeier said.

“So, a producer can be concerned about the profitability of the operation today and still believe that farmland will retain or increase its value over time.”

The barometer, which surveys 400 U.S. agricultural producers each month to measure farmer sentiment and the health of the agricultural economy, is showing that the near-term environment has become more challenging.

“Farmers are more concerned about costs. They’re less optimistic about their financial performance and they’re pulling back when you look at capital investment,” Langemeier said.

“However, that doesn’t mean that they’ve lost confidence in the longer-term value of the assets they own. For me, that’s key.”

Farmers are becoming more cautious about the economics of operating their farm in the near term, particularly with input costs — especially diesel costs and fertilizer costs — remaining a significant concern.

At the same time, their long-term expectations for farmland values remain very strong.

“So, while sentiment declined in September, the story is less about broad loss of confidence and more about increasing pressure on current farm economics or margins,” Langemeier said.