Welcome to 2025!
It’s not a lie that time flies at a much faster pace the older you get, because I am not sure how we got here so quickly.
This week marks our first week back from holiday mode, a welcomed shift for anyone ready to get back to business. Of course, with the run to six-month highs in corn during that two-week holiday stretch, a lot of grain traders and farmers will tell you they never ventured too far from business over the last part of December.
This week also marks the hard launch of the second round of South American weather concerns. Last week brought with it a great preview of the volatility that is likely to be present in this market over the next few weeks as we work to determine crop size and how cash trade and logistics will impact price.
South American Weather
The vast size of South America’s production area makes it difficult to make a blanket assessment on yield potential, though for the most part it has been easy to say much of South America has seen a decent start to their growing season.
While delays were seen early in the planting campaign across Brazil, good rainfall and a lack of threatening temperatures has allowed for some of the best vegetation indices on record for the whole of the country, according to the USDA’s FAS Crop Explorer website. Production-wise, most of Brazil’s current focus is on growing soybeans, though there is a chunk of area in Southern Brazil growing first crop corn that tends to go more into livestock feed than into the export market.
We are starting to see a split in the country develop, with above normal rainfall—something that is a feat in an area averaging over 10” of rain a month this time of year—in central and northern portions of the country, with dryness starting to show in the south.
At this point, the Southern dryness is concerning, but not enough to result in any type of production cut. The same could be said for the heavy rains to the north, as they are more than likely aiding production during pod fill. However, as the growing season looks like it may be extended due to the heavy rains, cooler temperatures and cloud cover, the concern begins to center on second crop corn plantings and possible delays.
Argentina is not sitting quite as well as Brazil after below normal rainfall throughout December looks to continue for at least the next two weeks. Like Brazil, quantifying the extent of losses, if there are any at this point, feels difficult as the area is vast and observed rainfall amounts have been variable. However, when taking into consideration all the factors that tend to influence Argentine production potential, a recent update by AiQ, a data focused analytical group, projected that up to 20% of the crop’s production potential could be at risk with a continuation of the current trend.
While it is far too early to say what exactly happens from a production standpoint across South America, it does feel as though we will likely land closer to the USDA’s current region-wide production outlook for soybeans than many thought even two weeks ago when the calls to ramp up South American production totals grew incredibly loud.
As for corn, with nearly 80% of Brazil’s production planted the last part of January through the month of February, traders will be watching to see if the forecast remains wet beyond the next two weeks. At this point delays are a given in some locations, with only time able to tell us the extent.
China
While South America’s production outlook is incredibly important, for obvious reasons, what happens next in China feels equally, if not more important.
It is amazing to watch Chinese leaders come out nearly every week with a new stimulus plan or policy, outright trying to talk the market up and rebuild consumer confidence, only to hear analysts say whatever leaders are doing is nowhere near enough.
I have no idea what it takes to break China out of this deflationary funk, or to get consumers excited to spend again. But I do feel like we may be underestimating the government’s willingness to keep throwing tools and money at the problem until the right plan sticks.
One thing that I am watching closely is China’s desire to build out new industries. From increasing electric vehicle production, to gaming, artificial intelligence, and more, Chinese leaders have expressed a clear desire to build out developing industries, helping to prop up what has been an ailing youth employment outlook. Taking this into consideration, it would make sense for China to look at ways to use domestically produced feedstocks for renewable energy. Related or not, we have seen a push by Chinese officials to keep used cooking oil supplies closer to home, something experts say will help drive growth in China’s sustainable airline fuel industry.
When it comes to ethanol, there is room for growth there too, as China is only thought to be using 63% of their overall grind capacity. With the fall of domestic corn prices seen recently, ethanol margins have improved significantly across the country, helping to increase usage rates, but still leaving us with grind capacity and corn demand that could be tapped into. With China’s ethanol blend rate hovering just over 2%, could we see them follow in the footsteps of other countries and bump that rate up to help increase corn prices, or work to increase ethanol production for exports? It would make sense.
In addition to possible shifts in domestic demand, China has some quality issues in their corn crop they will have to contend with in the year ahead. According to more than one source, warmer and wetter than normal conditions during and after fall harvest increased the incidence of vomitoxin and other molds, likely increasing their need for high quality imports for blending. However, this is something that is not likely to happen until after the Lunar New Year holiday, so late February at the earliest. How aggressive Chinese buyers are and where they make their purchases will hinge directly on what Brazil’s second crop corn outlook is when we get there.
Other Stuff
With so many moving pieces, it is difficult to succinctly put into words all the developments I will be watching in the week ahead. For the most part though, they tend to center around the same narrative; how do we quantify the growth in demand for biofuels around the world, and what does the shift in currency, margins, weather, and the geopolitical outlook mean for supply?
We will get an updated USDA supply and demand outlook at the end of the week, with one of the biggest information dumps of the year on tap. Based on cash market strength and the finishing weather we saw ahead of harvest; I feel the risk is there we see lower than expected production figures for both corn and soybeans.
In addition, with the great start to demand in corn, I would not be surprised to see further increases made to ethanol and exports, with the stocks’ figures shedding a light on whether feed usage is higher or lower than expected. Part of me believes the market is already working to trade a 1.5 billion bushel carryout at this time, possibly limiting excitement that would come from that number if it were printed.Soybeans are a wildcard. Demand-wise the USDA appears to be on track, with my focus landing primarily on production, after disappointing yield reports seemed to be commonplace for much of the fall.
When it comes to USDA projections, I feel it is super important to reiterate the fact they are somewhat backwards looking at this point in the year. This has been a point they have made clear throughout our many conversations on the matter, when building out reports this time of year they take into consideration the demand or production data they have, and what would typically happen with those figures in the months ahead under normal circumstances. What normal means now is anyone’s guess.
Next week we will dig into the USDA’s data and what it means. In the meantime, enjoy the entertainment, because it looks like things could get spicy. As always, don’t hesitate to reach out with any questions. Have a great week!
