As many of you are probably aware, the USDA surprised the market last week with their revised supply and demand estimates, which fell significantly short of traders' forecasts for both corn and soybeans. The reduction of 95 million bushels in soybean production and a staggering 276 million bushels in corn production caught traders off guard, altering the market dynamics we were anticipating. 

This week, I aim to explore the implications of the production changes as we progress forward, highlighting what aspects I will be monitoring closely, particularly with increasing concerns emerging in South America. 

Revised Inventory Levels and Utilization Rates

Following the significant reductions in production, the USDA made slight modifications to demand in their report released last Friday. Specifically for corn, feed and residual usage was decreased—this isn't unexpected since the USDA has consistently indicated that residual usage depends on the size of the crop. Additionally, due to the current trade situation and the observation of early sales, the USDA revised their export forecast downward by 25 million bushels. 

After accounting for both usage and production decreases, the USDA's revised estimate for corn ending stocks was more than 100 million bushels below traders' forecasts. The new figure stands at 1.54 billion bushels, indicating that corn ending stocks are anticipated to be almost 600 million bushels lower than the preliminary estimates released in May. 

Despite the aggressive approach, the exceptionally dry conditions led to harvest reports indicating soybean moisture levels at just 10%. Observing the behavior of the cash market, the reduction in soybean production was to be expected. The yield cut resulted in a decrease of 95 million bushels in overall production from the estimates made in November, significantly removing a portion of the previously considered 'excess' supply from the market. 

The decrease in production for both corn and soybeans has notably altered the market landscape, particularly in light of how lower prices have spurred a rise in global demand. Analyzing the stocks-to-use ratio, soybeans appear to align closely with historical pricing trends, while in the case of corn, one might contend that prices are slightly undervalued at 10.2%. 

What Does It Signify?

The reduction in carryout for soybeans is likely to provide some price support, but the impact on old crop prices may differ from that of corn. With an ending stock level of 380 million bushels, soybeans still have a sufficient supply, particularly given the uncertainties surrounding trade and biofuel demand, along with the anticipated surge in new supply from Brazil in the coming weeks. 

Traders currently perceive the tightness in the corn market to be primarily with the old crop, although there are lingering doubts about the sustainability of final demand, as many believe that the substantial export levels are merely a front-loading phenomenon. The price surge in corn over the past few months, following a significant drop that brought prices well below production costs in early September, along with a heightened need for cash, has prompted farmers to take a more assertive selling approach this year compared to last. It is estimated that more than 60% of the bushels from farmers have already been sold. 

The recent effort to channel corn into the pipeline has resulted in a narrowing of spreads and a decline in basis, which is to be expected. Many may argue that this decrease in spreads and basis indicates an oversupply relative to demand, and they are correct; it’s unrealistic to expect the entire 60% of the crop to be fully utilized when moved into the pipeline during the initial 35-40% of the year. It would raise more concerns if there were such a significant flow of corn from farmers while the cash market showed ongoing signs of strengthening, compared to the current situation we are observing. 

Trump's Stance on Trade and Biofuels

Certainly, the trade policies and biofuel strategies of the Trump administration will significantly influence demand and, in turn, prices. While many are inclined to maintain a pessimistic view regarding price forecasts during Trump's tenure—an understandable stance given the events of his previous term—I believe it's crucial to adopt a careful perspective when considering potential changes in the landscape under his leadership. 

First and foremost, the perspective on renewable fuels and the industry as a whole has shifted significantly compared to previous years. Following the Inflation Reduction Act, energy companies have poured substantial investments into renewable resources, including some that are prominent allies of Trump, suggesting they are unlikely to leave the negotiations feeling dissatisfied. Similarly, farmers have demonstrated their support for him during the trade war period and beyond, which could be seen as a parallel situation. 

Although uncertainty persists following Biden's announcement of the proposed 45z tax regulations—rather than finalized rules—on Friday, it is reasonable to conclude that the absence of tax credits for foreign-produced used cooking oil is likely to remain unchanged. Furthermore, the substantial increases in global demand we are currently witnessing are expected to persist, as biofuels continue to be the most accessible option for governments looking to address multiple objectives simultaneously. 

This week brought us two contrasting reports on trade. The first, which came out on Monday and was later downplayed by Trump, seemed somewhat more optimistic compared to the one CNN published later in the week. If Trump decides to impose universal tariffs on all 'critical imports' or declares an economic emergency to take unilateral action, the effects on prices would likely differ significantly. As it stands, I would guess we might find ourselves in a more moderate position, despite the fact that many traders appear to have already factored in a worst-case scenario or something quite similar. 

Weather Patterns in South America

Although concerns persist about trade and biofuels, it is crucial to highlight that the confidence we previously had in the South American crop forecast has diminished somewhat in recent weeks. 

The soybean harvest in Brazil is set to break records, although it may fall short of the massive figures that traders were predicting in mid-December. Drought conditions in southern Brazil, paired with excessive rainfall in the central and northern regions, have dampened high-end expectations. Additionally, dryness in Paraguay and Argentina is raising concerns about the production forecasts for both nations. While a complete crop failure is unlikely, the discussions surrounding an extra 20 million metric tons, or approximately 700 million bushels, on top of an already substantial year-over-year production rise have largely faded away. 

When it comes to corn, there are significantly more uncertainties than certainties, particularly since 77% of Brazil's corn planting is scheduled for late January to February. Farmers are expected to strive for maximum planting of second crop acres, driven by favorable price incentives. However, the duration of the excessive moisture in certain regions of Brazil may influence production forecasts, as predictions indicate above-average rainfall will persist in some of the most saturated areas over the next two weeks. 

In Brazil, the primary concern from now until March isn't so much the current weather conditions, but rather the potential for an early cessation of rainfall or an occurrence of frosts earlier than usual. Both scenarios are more likely due to the influence of La Nina. As a result, many Brazilian farmers are striving to complete their planting by the end of February, making the pace of planting a crucial element affecting prices in the coming weeks.

In Argentina, the weather outlook continues to be dry, raising concerns in the region. Certain models are predicting rainfall for this week, which is crucial for mitigating the decline in soil and crop health. The amount of precipitation received and the progression of the forecast will be vital this week, especially with discussions suggesting that the GFS model is indicating significantly drier conditions compared to the Euro model and others. 

Fresh Cultivation Fields

Just as holiday decorations start appearing in stores long before Halloween, we were discussing the impact of new crop yields on prices even before the final figures for the old crop were available. For months, the ratio of new crop corn to soybeans has been indicating a likely rise in corn acreage, and traders have embraced this notion wholeheartedly. As a result, December 2025 corn prices appear stagnant, with most trading activity concentrated in the near-term contracts. 

The decline in available old crop soybean supplies has effectively limited the market's capacity to handle a decrease in plantings exceeding 2 million acres. This scenario could lead us to a carryout figure nearing 200 million bushels, which would push us into rationing territory if demand remains relatively stable compared to the previous year. 

I want to remind everyone that when considering new crop plantings, many farmers prioritize crop rotation over market prices in their planting choices. Additionally, it's important to take into account cash flow, as soybeans tend to be less expensive to cultivate compared to corn. 

At this stage, I anticipate that we will witness significant changes in the forum landscape over the coming year, although perhaps not to the degree that traders are currently predicting.  

Ultimately

Ultimately, it's impossible to overlook the change in sentiment that is probably influenced by the production update released on Friday. Even the most pessimistic traders will have to acknowledge that there is a bullish risk to prices—or at the very least, there will be a necessity for higher risk premiums to be integrated into the market compared to where we began the day. 

Currently, we are monitoring the weather patterns in South America along with the various elements affecting the movement of grains from the area. As the harvest season begins, the Brazilian soybean basis is expected to exhibit ongoing weakness. However, with a more favorable economic forecast for Argentina, we may witness shifts in demand, particularly if the projections for Argentina’s crop begin to decline.  

Feel free to contact me if you have any questions. Wishing you a wonderful week ahead!
 

On the date of publication, Angie Setzer did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.

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