Ag Confidence Index Results

By Katie Micik
DTN Markets Editor

OMAHA (DTN) -- Famers are feeling pretty glum about current economic conditions, but they expect commodity and input prices are going to stabilize, buoying overall sentiment.

The latest reading of the DTN/The Progressive Farmer Agriculture Confidence Index came in at 99.4. An index value of 100 is considered neutral; higher values indicate optimism and lower values reflect pessimism.

The index is an average of farmers' and ranchers' assessments of their present situation and their expectations of conditions 12 months from now, and that combination has led to a near-neutral index value.

DTN surveyed 500 farmers and ranchers across the country between Aug. 5 and Aug. 17, before recent stock market turbulence began. DTN conducts the survey before planting, before harvest and after harvest each year to gauge farmers' attitudes at key times of the crop cycle.

Farmers' assessment of their current situation is the lowest it's been since DTN began surveying farmers in 2010. That index value is 101.5, which is still an optimistic figure under DTN's methodology, but it's fallen from 118 last August.

Meanwhile, growers' expectations about next year's business conditions have improved to an index value of 98, up from 88 last August. It's the highest reading since August 2012.

"The present situation has deteriorated compared to a year ago," said Robert Hill, owner of consulting firm Caledonia Solutions and designer of the index. "Commodity prices have not rebounded, incomes have slipped, and farm wealth has eroded in the past year. On the other hand, the future is looking rosier than it appeared just 12 months ago, and this may be coming from relative stability in commodity prices versus the freefall that ran up to the 2014 measure."

Barry Mumby, a farmer from southern Michigan, said farmers' current attitudes probably depend on where in the country they live and how well they've managed their risk.

"I think you're going to find a lot of variance in crop outlook and how farmers feel about things," he said.

AGRIBUSINESS BLUES

DTN also surveyed 100 local agribusinesses from Aug. 3 to Aug. 12 about their feelings toward the current business environment. The DTN/The Progressive Farmer Agribusiness Confidence Index fell to its lowest reading, 92, since surveying began in August 2010.

The agribusiness index has previously registered two negative readings. The first was in August 2011 when businesses were nervous about macroeconomic instability. The second, in August 2012, was related to concerns about how farmers would bounce back from the drought.

This year, the concern has more to do with farmers' incomes. USDA recently lowered its outlook for 2015 net farm incomes to $58.3 billion, down 36% from last year. It's half of what farmers earned in 2013, and the lowest income forecast in nine years.

"Agribusinesses are substantially more negative versus a year ago, both for their current situation and for their future expectations," Hill said. "They are the ones who are bearing the brunt of the growers' sour moods. Growers have found ways to cut spending per acre, and they will continue to do so. Such cuts are impacting rural businesses and the local communities they serve."

About 25% of the respondents to DTN's survey expect lower sales in the year ahead, a 16-percentage-point increase from March's survey. A similar number also see profitability taking a hit next year.

Hill said he's heard "an earful about crop input prices" from farmers lately.

"We can expect that growers will continue to look for ways of changing their input strategies in order to deal with their reduced financial prospects. We saw this come through last spring in fertilizer and seed purchases, where they managed to, on average, reduce reliance on the Cadillac inputs."

INPUT ANGST

Mumby said farmers economized on inputs for the 2015 crop, and "I think we will see it again next year. I think it will be intensified, frankly."

Forty-eight percent of farmers who responded to DTN's survey classify current input prices as bad, and 53% think prices will be about the same one year from now.

Mumby doesn't think input prices are going to come down all that much, nor does he think the ag economy could withstand much of an increase.

He thinks farmers are going to start by cutting their seed costs, choosing varieties with fewer stacked traits. He thinks most will aim to spend less than $200 per bag.

"I think (seed companies will) sell as many kernels, but I don't think they'll sell as many high-priced kernels. I don't think farmers will cut back on populations. I think they've realized that you have to keep your populations up if you're going to maintain yield," he said.

Mark Nowak, a farmer and consultant in Wells, Minnesota, agrees that seed is going to be the first place farmers look for cost savings.

"The way I see it, I need to lower my cost of production by $1 per bushel because $3.50 corn is something I need to figure out how to live with," he said. That means he needs to take 20 to 25 cents off the price of seed per bushel. He also hopes he could shave 30 cents per bushel off fertilizer.

Mumby thinks farmers won't skimp on nitrogen applications because it could damage yield potential, but they might draw on the soil fertility they built up during the boom years for other nutrients.

"I think you can economize in those ways and not necessarily hurt your potential yield," he said. "I think that's what everyone's looking for. They're trying to maintain yield and trying to cut costs."

Land costs have to come down. Nowak said some of the farmers he consults for have gotten 25% to 30% reductions in rental rates, but he's also heard stories of stubborn landlords.

"I have seen -- I don't want to call significant -- but an uptrend in flex leases. Now the farmer has a better shot at lowering his cost of production, but if we get a big crop and price rally, the landowner has a shot at making more too," he said.

Hill said he thinks downward pressure on rents should make a real impact over the next year or so, and may be part of the reason why farmers expect improvement over the next 12 months.

MANAGEMENT AND INCOME

Nowak spent 45 years as a lender, and he's seen exhilaration during the good times and desperation in the bad.

"Marketing has been so key the past few years as the market slid down from ultra-profitable prices," he said. It's even more important now that USDA sees farm-gate corn prices averaging $3.65 per bushel and soybeans $9.15.

Nowak said farmers with above-average yields who sold corn at $4.50 and beans at $11-$12 will have a good year.

"But at the other extreme, if you're a farmer going into this fall with a bin full of grain unsold, you're looking at selling below the cost of production. Those guys will start feeling pressure when the reality sets in."

Nowak and Mumby estimate farmers have forward priced 22% to 25% of the new crop.

If farmers want to be profitable over the next year, Nowak thinks it's going to have to come from capturing the carry in the market and basis improvement.

"If we can get a 20-cent basis improvement and a 30-cent carry, that's 50 cents" where farmers can make up some ground, Nowak said. "There's going to be an advantage to those who understand that compared to the folks who don't."

Mumby recently delivered soybeans he had forward priced in winter 2013. He likes to forward price some of his crop far in advance, but currently the market's not offering him much of a chance to make a profit.

"I don't have the opportunity to price it forward at a profit," he said. "There's no light at the end of the tunnel right now for prices. The only thing you hope for is that input prices don't go up."

One of the bright spots Mumby sees is that farmers have locked in low interest rates on long-term land and equipment debt. He also thinks farmers in general have become better marketers and improved their production skills, all of which makes conditions in 2015 better than during the 1980s farm crisis.

Both Mumby and Nowak agree it will pay off to be an astute manager during the 2015-16 crop year.

"You've got to manage your cost of production," Nowak said. "The guys who throw their hands in the air and say 'there's nothing I can do about it' are going to be in trouble."

For more information about index methodology, please visit http://about.dtnpf.com/…

Check out the DTN Reporter's Notebook video with DTN Markets Editor Katie Mick about the latest Ag Confidence Index results at http://bit.ly/… or http://www.dtn.com/…

Katie Micik can be reached at katie.micik@dtn.com

Follow Katie Micik on Twitter @KatieMDTN

(GH/AG/ES/CZ)

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