Market Matters Blog

Parts of Ag Confidence Index Show Correlation to Corn Prices

The blue line shows DTN's index for crop producers' present situation. With the exception of September 2012, it closely tracks the national average cash price of corn. (Chart by Darin Newsom)

One of my favorite parts about the DTN/The Progressive Farmer Agriculture Confidence Index is that I do a lot of interviews with farm broadcasters. It's fun to be the "expert" in interviews every once in a while.

One of the broadcasters asked me about the role the weather plays in the index's findings. I had, after all, discussed at great length how the index reflected the past year's corn price decline, and that's not exactly what the conversation had been in the past.

It's an interesting question, and one that doesn't have a hard and fast answer, but we're getting closer. We now have four years of data to look at, and that's a big step. When we first wrote stories about the Ag Confidence Index, it was difficult to pick out trends and explain the drivers. There just wasn't enough data for comparison.

Last week, I asked DTN senior analyst Darin Newsom to dig into the numbers a little bit for me, particularly whether the index tracked along with the price of corn. Newsom found that when you look at crop producers' response separate from livestock producers responses, there was a correlation when you look at how farmers rate their present input and income situation.

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"The strong correlation between the monthly close of the DTN National Corn Index (national average cash price, or NCI.X) prior to the collection of data for the Ag Confidence Index highlights just how heavily the corn market can influence opinion," Newsom said. "The chart compares the NCI.X with the current grain producer index, with the two showing a very strong correlation of 72.5%. As for the general index, the previous monthly close of the NCI.X has a correlation of approximately 64%, still a strong tie.

"Yes, I understand the statistical rule that correlation does not prove cause, but the link between the two seems mostly unbreakable. I say mostly because of the outlier Ag Index from September 2012. That month saw the index drop 20 points from the March numbers despite cash corn closing at an all-time high. It is just as interesting to note that the Ag Index bounced back for the next release in December 2012."

September 2012 was an interesting point in time to take a survey of the sentiment of farmers -- that summers' "flash drought" robbed them of good yields, and many were just figuring the damage. Our methodology asks farmers to rate their current input prices as good, bad or normal. Then we ask whether they think prices will be better, stay the same or get worse 12 months down the road. We ask the same questions about farm income. That fall, we saw a strong shift in how farmers viewed their income. More than 25% of farmers called their income "bad," up from 10% in the spring. My guess is that this reflects farmers who forward contracted grain early in the season and got caught upside down. Also, our survey was taken before the harvest price for crop insurance was set. So there were a few variables that could explain why that fall's reading broke away from the correlation to corn prices.

Now, let's return to my friend's question on weather's impact on the index. The weather during the growing season of 2012 took a distinct toll on the psyches of farmers before harvest. Production concerns reigned, and higher prices appeared to be a small consolation. As farmers tallied the elevator tickets and reconciled their checkbooks, higher prices alleviated some of the angst.

What we don't know yet is if this pattern in our index would repeat if we encountered another 2012-esque growing year. Will September 2012 become an outlier in our data set? It'll be on the "things to watch for" list.

One other note on the weather: I think weather plays an important role is in how farmers define their expectations for the year ahead. No one can plan for the weather. We talked to Peru, Ind., farmer Allie Wilson last week, who said he expects income will be lower in 2013, but he could see 2014 income going either way.

"It all depends on what Mother Nature gives us this growing season for 2014 farm income," Wilson said.

So, I've laid out the case for market prices and for the weather. There's still plenty to study. For instance, how closely to farmers' expectations of conditions 12 months from now track with the next year's December futures prices? And, with the corn supply expected to grow this year, will the correlations shift to soybeans as that crop makes up a larger portion of income?

Like Newsom said, correlation is not cause, but it provides an interesting window into the data.


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