The grain markets have seen increased volatility since the USDA planting intentions report last month. This should be expected because spring weather determines when crops will be planted, the initial conditions for germination, and whether there is switching of crops. All of these factors will affect supply. A late spring means that some farmers will switch to a crop that can germinate later. A wet spring will affect soil compaction which will cause a decline in yield. The plant may not be able to develop a strong root system in compact soil. Most important is the combination of moisture and warmth which will drive the timing of germination. A bad spring will drive yields lower and the amount that is ultimately harvested. The increase in planting intention may occur on land that is less favorable for corn.
The difference between planting intentions and actual plantings is one form of production slippage. The difference between what is planted and acreage harvested is another form. Bad spring conditions can drop the amount that is planted by up to 5%. Some crops like corn have large production slippage. The last five years shows that the drop in corn acreage harvested relative to what has been planted has been approximately 10%. The closest substitute for corn, sorghum, has seen differences of over 25% between what has been planted and ultimately harvested. This will have an effect on corn prices.
Because of this potential variation in production, corn prices are currently more sensitive to small weather changes. Nevertheless, the variable that has made planting so important is the ending stock balance for 2006-07 corn which is over 50% lower than in either of the last two years. The total use has increased close to 25% in the last five years and is expected to be even higher for 2007. Given current conditions, we would assume that this year will see greater slippage in yields and harvested acreage for corn. With the low ending stocks, any marginal reduction will drive prices higher.
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