U.S. farmer sentiment stable as inflation expectations subside
- Farmers' inflation expectations for the upcoming year were markedly lower than those reported a year ago for 2023
- Farmers reported another improvement in their farms' financial performance during the month of December, with a 2-point increase compared to the previous month
- The Farm Capital Investment Index reading of 43 marked a 13-point increase compared to the same period last year
- High input costs continue to be concerning for U.S. farmers
Insights
The Purdue University/CME Group Ag Economy Barometer provides an insightful gauge of the agricultural sector's economic sentiments, particularly among U.S. farmers. The slight decline in the overall barometer and its subindices suggests a stable yet cautious outlook among producers. The observed reduction in inflation expectations is significant, as it may indicate a shift in cost pressures facing farmers, potentially easing margins and influencing planting decisions for the upcoming year. This change aligns with broader economic trends where inflationary pressures have been a central concern for various sectors.
It's also worth noting the Farm Financial Performance Index's uptick, which correlates with the USDA's more optimistic farm income outlook. Such positive financial indicators could suggest improved liquidity and capital availability for farmers, which can enhance their ability to invest in their operations. This is further evidenced by the slight increase in the Farm Capital Investment Index. However, the modest one-point month-over-month increase indicates that while sentiment is improving, farmers remain cautious in their capital expenditure decisions, likely due to the lingering uncertainty in input costs and market conditions.
The emphasis on 'higher dealer inventories' and 'strong cash flows' as drivers for investment decisions highlights the importance of supply chain dynamics and financial health in the agricultural sector. These factors are critical for understanding the timing and scale of farmers' investments, as they directly affect the availability of equipment and the affordability of expansion or upgrades to farming operations.
The Ag Economy Barometer's findings can have ripple effects on various market segments related to agriculture, including equipment manufacturers, fertilizer and seed suppliers and agricultural financiers. The reported increase in the Farm Capital Investment Index, albeit modest, suggests that farmers are more inclined to make capital investments than they were last year. This could lead to increased demand for agricultural machinery and equipment, which would benefit manufacturers and dealers in this space. The reported 'higher dealer inventories' could result in more competitive pricing and sales incentives, potentially stimulating the agricultural equipment market.
From a financial perspective, 'strong cash flows' indicate that farmers are in a better position to service existing debt and take on new loans. This could have a positive impact on the lending institutions and investors focused on the agricultural sector. However, the ongoing concerns over high input costs could dampen the enthusiasm for new investments, as farmers may opt for a more conservative approach to manage financial risks.
The barometer's data, particularly the Farm Financial Performance Index, provides a lens through which to assess the health of the agricultural sector. An upward trend in financial performance can be a leading indicator for other sectors that are dependent on agricultural productivity, such as food processing and distribution. As such, stakeholders in these sectors would be well-advised to monitor these trends closely.
The agricultural sector's sentiment, as reflected in the Purdue University/CME Group Ag Economy Barometer, can serve as a bellwether for the broader economy, especially in rural areas where agriculture plays a vital role. The report's implications extend to investors and analysts monitoring agribusiness companies, commodity markets and the overall health of the rural economy. The stabilization of inflation expectations among farmers is a positive signal, potentially leading to more predictable costs for agribusinesses and more stable commodity prices, which in turn can affect the earnings and stock performance of publicly traded agricultural companies.
The nuanced understanding of farmers' investment intentions, as evidenced by the Farm Capital Investment Index, is crucial for predicting future agricultural productivity and supply levels. A willingness to invest in capital improvements can lead to increased efficiency and output, which might affect commodity supply and pricing. This is particularly relevant for investors in commodity futures and companies within the agriculture supply chain.
Moreover, the alignment of the Farm Financial Performance Index with the USDA's revised farm income outlook provides a data point that may influence investor sentiment towards the agricultural sector. An improved income outlook could result in a more favorable view of the sector's financial stability and growth potential, impacting stock valuations and investor interest in agricultural stocks and related ETFs.
The December barometer recorded a reading of 114, just one point lower than in November. Both subindices of the barometer, the Index of Current Conditions and the Index of Future Expectations, mirrored this slight decline, settling one point below their respective November figures at 112 and 115. Notably, farmers' inflation expectations for the upcoming year were markedly lower than those reported a year ago for 2023. This month's Ag Economy Barometer survey was conducted from Dec. 4-8.
Farmers reported another improvement in their farms' financial performance during the month of December. The Farm Financial Performance Index saw a 2-point increase compared to the previous month, marking a continued positive trend. Since late summer, the index has climbed 11 points, and at year-end, it was 21 points above the low point for 2023, which occurred in May.
"The shift in farmers' perception of financial performance during the fall quarter corresponds with USDA's (
The Farm Capital Investment Index reading of 43 was only one point above November's, but it marked a 13-point increase compared to the same period last year. Respondents endorsing the notion that now is a favorable time for substantial investments in their farm operation cited "higher dealer inventories" and "strong cash flows" as key factors supporting this perspective. While the percentage of respondents selecting "strong cash flows" as a rationale for investment rebounded from the previous month, it remained less popular than in July and August. Conversely, in December, the percentage of producers citing "higher dealer inventories" as a primary motivation for investment was more than double the proportion who expressed a similar sentiment in July.
"High input costs continue to be concerning for
Farmers concerned about the risk of lower prices for crops and livestock increased from
Producers' inflation expectations moderated, with
Perspectives on farmland values weakened slightly in December compared to November. The Short-Term Farmland Value Index fell 4 points to a reading of 121, while the long-term index decreased by 2 points to 149. Compared to a year ago, the short-term index was down 3 points, while the long-term index was 9 points higher.
"The improvement in farmers' interest rate expectations since late 2022 could help explain the year-to-year rise in farmers' long-term farmland value expectations," Mintert stated.
About the Purdue University Center for Commercial Agriculture
The Center for Commercial Agriculture was founded in 2011 to provide professional development and educational programs for farmers. Housed within Purdue University's Department of Agricultural Economics, the center's faculty and staff develop and execute research and educational programs that address the different needs of managing in today's business environment.
About CME Group
As the world's leading derivatives marketplace, CME Group (www.cmegroup.com) enables clients to trade futures, options, cash and OTC markets, optimize portfolios, and analyze data — empowering market participants worldwide to efficiently manage risk and capture opportunities. CME Group exchanges offer the widest range of global benchmark products across all major asset classes based on interest rates, equity indexes, foreign exchange, energy, agricultural products and metals. The company offers futures and options on futures trading through the CME Globex platform, fixed income trading via BrokerTec and foreign exchange trading on the EBS platform. In addition, it operates one of the world's leading central counterparty clearing providers, CME Clearing.
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Writer: Erin Robinson, erobin@purdue.edu
Source: James Mintert, 765-494-7004, jmintert@purdue.edu
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