A Grain Supply Surprise Puts Demand Back in Focus

 

 

Harvest brings significantly more information to the crop price outlook. By October, combines are moving across more acres, and USDA now has more yield information to use in its forecasts. For agricultural lenders, that information provides a clearer picture of potential borrower revenue and repayment capacity heading into year-end and 2027 planning.

The first surprise came before USDA's October World Agricultural Supply and Demand Estimates, or WASDE, report. The Sept. 30 Quarterly Grain Stocks report showed corn stocks totaled 2.10 billion bushels on Sept. 1, up 35% from a year earlier. We knew there was a lot of corn around. The surprise was just how much. Soybean stocks provided less of a shock at 315 million bushels, down 3% from last year.

That changed the starting point for the 2026-27 balance sheet. USDA had to incorporate those larger corn beginning stocks alongside updated harvest acreage, yield and production estimates.

 

October brings a clearer look at yield and overall grain and oilseed supplies

In the October WASDE, 2026-27 corn supplies were raised by 173 million bushels in beginning stocks, based on the increased stocks in the USDA’s Sept. 30 Grain Stocks report. USDA then further raised corn supply by an additional 234 million bushels of production, based on a 2.7-bushel-per-acre increase in forecast yield to 181.2 bushels per acre. That yield increase was unexpected, and initial market reaction was quite negative.

For soybeans, beginning stocks were decreased slightly based on the September stocks report data. Like corn, the 2026-27 soybean yield forecast was also increased, but more moderately, by just 0.3 bushels per acre to 53.1 bushels per acre. While the adjustment was small, if realized, this would be a record national average soybean yield. Expected soybean supplies were raised by 17 million bushels in total.

October does not give us the final answer on crop size. USDA will continue updating yield and production as harvest progresses. There is also plenty of variation at the farm level. Across the U.S., reports have ranged from very strong yields to fields where storms, excess moisture, drought or other weather challenges took a toll. For lenders, the national supply picture is becoming clearer, even as borrower-level outcomes remain highly localized.

 

More grain supply puts more pressure on demand

With the supply picture becoming clearer, demand takes on added importance. While expected corn use increased across the board, the additional 125 million bushels of demand was less than the supply increase, and the season-average price forecast fell 10 cents to $4.70 per bushel. For soybeans, USDA increased export expectations by 10 million bushels and left the forecast season-average price unchanged at $12 per bushel.

 

Stronger crop prices create a different margin picture for livestock

Crop prices remain stronger than they were earlier in the year, even after the Quarterly Stocks report and October WASDE cooled markets from recent highs. That is supportive for crop revenue but can raise feed costs for livestock and dairy borrowers. That creates additional margin pressure where livestock or dairy prices have softened

USDA lowered its 2026 and 2027 beef production forecasts in October, but cattle prices still remain historically strong. That continues to support the revenue side of many beef operations, although feed, replacement cattle and other costs remain important to margins.

The dairy outlook is more mixed. USDA lowered expected milk production slightly for both 2026 and 2027. The 2026 all-milk price forecast remained at $19.90 per cwt, while the 2027 forecast increased to $20.45. At the same time, Class III and Class IV prices are moving in different directions, making milk utilization and individual mailbox prices important to the margin outlook.

 

Ultimately, the number that matters is margin

Crop prices remain among the strongest producers have seen in several years, even after the latest USDA reports pulled markets back from recent highs. That is positive for revenue projections for crop borrowers but can increase feed costs for livestock operations.  Energy, fertilizer and financing costs also put pressure on the margin equation.

Interest rates add another cost variable. The Federal Reserve raised its target range for the federal funds rate by 25 basis points in September to 3.75% to 4%, citing elevated inflation. Since then, the Fed’s preferred inflation gauge has remained elevated, with August PCE inflation at 3.4%, above the Fed's 2% goal. Meanwhile, September CPI inflation increased to 3.7% year over year.

At the same time, the national unemployment rate was 4.2% in September, while nonfarm job growth slowed. Persistent inflation could support another rate increase, while softer labor market data could give the Fed reason to pause when the Federal Open Market Committee meets later this month. Together, the data leave the next interest-rate move uncertain.

For borrowers and lenders, financing costs are likely to remain an important part of 2027 cash flow and operating-line discussions, even if the pace of rate increases slows.

 

Bringing it down to the operation

The practical question is: What do today's crop and livestock prices and tomorrow's expected costs mean for a borrower’s breakeven?

Harvest results, local basis, marketing decisions and individual cost structures will make that answer different for every operation. For livestock and dairy borrowers, feed costs, production levels and local prices received add another layer.

Higher input costs make updated breakevens particularly important heading into 2027. Improving a breakeven does not necessarily mean simply cutting inputs. The more useful question is whether each expense is expected to generate an adequate return and whether proposed cost reductions improve efficiency without materially reducing revenue potential.

Input timing matters as well. Some producers delayed fertilizer purchases in fall 2025, expecting lower prices, only to see costs move higher in spring 2026 instead. Incremental purchasing and prepaying portions of expected needs can help manage price risk while preserving flexibility.

For lenders, two useful questions heading into annual reviews are: What input costs are already locked in, and what remains exposed to price movement? How sensitive are projected cash flow and working capital to changes in commodity prices, input costs or production amounts?

In a year when both revenues and costs remain uncertain, updated breakevens, realistic commodity-price assumptions and cash flow sensitivity analysis can help sharpen 2027 financing discussions.

 

The information provided is accurate to the best of the author’s knowledge at time of publishing. It is presented “as is” with no guarantee of completeness, accuracy or timeliness, and without warranty. The information is educational in nature and not investment, legal, accounting, tax or other advice of any kind.