by James Mintert
The Purdue University-CME Group published results of its 72nd monthly survey in October, which marked the sixth anniversary of a data source that gives farm equipment manufacturers a window into the thoughts that drive farmers’ buying choices.
In this issue of Ag Innovator, we look at the evolution of the survey and the insights the data offer.
There is a relatively long history of sentiment surveys on the U.S. economy. The oldest and best known is the University of Michigan’s Survey of Consumers. It originated in the post-World War II era and appeared in its current form in the 1950s. The early surveys focused on learning more about household assets and debts, but over time, the value of ancillary information regarding consumer sentiment became clear in the pursuit of anticipating consumer behavior.
Survey responses were eventually condensed into the Index of Consumer Sentiment as well as the Current Index, which focuses on current economic conditions, and the Expected Index, which focuses on consumers’ expectations for the future. Results from the monthly Survey of Consumers are widely disseminated and are now a component of the Department of Commerce’s Index of Leading Economic Indicators.
In the decades since, sentiment surveys proliferated. Many sought to understand the sentiments of purchasing managers and corporate executives, but none focused on the agricultural sector and, more specifically, on agricultural producers.
The Ag Economy Barometer survey was designed to fill this void, using methodology adapted from Michigan’s Survey of Consumers to launch a monthly national survey of commercial-scale agricultural producers.
Agricultural producers’ sentiment is quite volatile. Comparing month-to-month percentage changes in the Index of Consumer Sentiment to those of the Ag Economy Barometer reveals that agricultural producers’ sentiment is nearly three times as volatile as consumer sentiment.
The percentage change in the Ag Economy Barometer each month from its inception in fall 2015 to recent data shows an average of 9.4 percent compared to a 3.3 percent monthly average change for the Index of Consumer Sentiment.
Differences in the volatility of these two sentiment measures reflect the stark differences in the two survey populations. The Survey of Consumers samples opinions from a broad spectrum of consumers that, by design, covers all segments of the U.S. economy. Broad coverage of the U.S. economy implicit in the Survey of Consumers tends to smooth responses over time as positive/negative developments in one area of the economy are often partially offset by opposing developments in other segments.
The Ag Economy Barometer survey covers just one relatively narrow segment of the U.S. economy: the agricultural production sector. Moreover, the agricultural production sector is characterized by inelastic supply-and-demand conditions leading to a high degree of income variability. Differences in these two survey populations account for much of the observed volatility differences.
Second, although changes in commodity prices can and do affect farmers’ sentiment, changes in the Ag Economy Barometer are not simply a function of shifts in key commodity prices. For example, monthly average U.S. corn prices explain less than 20 percent of the month-to-month variation in the barometer. Instead, it turns out that agricultural producer sentiment is affected not just by commodity prices and the resultant income changes but also by a host of events and concerns.
What are some of these other events and concerns?
First, a change in the political winds can influence attitudes. Producer sentiment improved markedly after the 2016 election; the barometer rose from a reading of 92 in October 2016 to a peak of 153 in January 2017—a 66 percent increase.
Producers felt better about both their current situation and the future, but the biggest driver of sentiment was in the Index of Future Expectations, which saw a 78 percent improvement from January to October.
Although there likely was a myriad of reasons for the sentiment shift, subsequent surveys revealed that producers expected a more favorable regulatory environment and tax policy for agriculture as well as a better outlook for ag trade.
Following the 2020 presidential election, the sentiment shift was not nearly as pronounced as 2016, but there was a dip in sentiment as the barometer declined 9 percent following the election. The sentiment shift was entirely attributable to weaker expectations about the future. The Index of Future Expectations fell 16 percent from October 2020 to November 2020 while the Index of Current Conditions, riding the wave of strengthening commodity prices in late 2020, rose by 5 percent.
A series of questions posed just prior to the 2020 election and repeated after it revealed some of the reasons for the decline in future expectations. Producers after the election were more concerned about the agricultural sector facing more restrictive environmental regulations, higher estate taxes, and higher income taxes than they were before the election.
Producers also expressed concerns that the farm income safety net would be weaker in the future and that support for the ethanol industry would decline.
Farm Capital Investment Index
Like the Survey of Consumers, the Ag Economy Barometer seeks to build data that offers insight into producers’ investment decisions.
The Farm Capital Investment Index is based on a question posed each month that asks producers whether now is a good or bad time to make large investments in things like buildings and machinery for their farm.
The index often fluctuates in a band between 40 and 70, but in 2020, it dipped to a near-record low of 38 in April. This coincided with the start of the pandemic. The investment index recovered rapidly during the summer and the fall as commodity prices strengthened, peaking at a record 93 in December 2020 and again in January 2021. The strengthening in the investment index coincided with strong U.S. farm equipment sales.
One of the challenges in interpreting the Farm Capital Investment Index is differentiating between producers’ perspectives on purchasing machinery vs. investing in buildings and grain bins. To explore this question, the survey expanded.
In March 2020, farmers began to answer a question specific to their plans for buying farm equipment, and in May, they started to answer a question about their plans for constructing new farm buildings and/or grain bins in the upcoming year.
Although we don’t have extensive history for these new questions, early results are insightful.
After peaking this past winter, the Farm Capital Investment Index began to weaken, dropping 43 points from January to July, which left the index 10 points below its July 2020 reading. Within that index though, the data told a more nuanced story.
The percentage of producers planning to reduce purchases compared to a year earlier increased from 36 percent in the first three months of this year to 48 percent in July. At the same time, the percentage of producers planning to hold their machinery purchases constant declined from an average of 52 percent in January, February and March to 42 percent in July.
It’s obvious that some of the investment index’s weakness was attributable to producers shifting from the “about the same” purchases category to the “lower” purchases category, but that doesn’t completely explain the decline.
Early responses to the farm building and grain bin construction question indicate that perspectives on new construction vs. farm machinery purchases differ. In May, most producers said construction plans for the upcoming year were lower than a year earlier. That percentage rose in June, and in July, two-thirds of survey respondents said their construction plans for the upcoming year are lower than a year earlier. This perspective is significantly more negative than the outlook provided by producers regarding their farm machinery purchase plans, which gives important context to the investment index.
But does this additional information complete the story? Perhaps not.
The investment index results in 2021 are further clouded by widespread supply chain problems leading to long lead times and rising costs. What we don’t know is how much impact these factors had on farmers’ machinery purchases and new construction plans in 2021.
We are sure though farmers are concerned about rising input prices. Thirty percent of respondents on our July 2021 survey said they expect farm input prices to rise eight percent or more in the upcoming year. That’s more than four times the average annual farm input price rise of the last decade.
We will learn more in coming months as the picture becomes clearer around supply chain dynamics, and we hope to offer insights to the farm equipment manufacturing industry.
James Mintert is professor of agricultural economics and director of the Center for Commercial Agriculture at Purdue University. Visit the Ag Economy Barometer website at purdue.edu/agbarometer. You can subscribe to receive the monthly report, which is published the first Tuesday of every month.