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Slow Corn Planting May Bring Acreage Shifts

Much of the talk in the market in the first half of May obsessed about the slow pace of corn planting this spring. Look for the discussion in the second half of the month to try to figure out just what if anything those delays may mean to production.

The debate could be lively, because there's no slam-dunk way to predict the impact of the weather so far. But here are some of the possibilities under discussion, and what the numbers actually say about their impact, based on history dating back to 1980.

Late corn planting means lower yields. This appears to be mostly false. To be sure, early planting increase yield potential, and visa versa. But, there's a difference between potential yield and what actually is produced, which depends more on weather during the actual growing season.

Yields did indeed come in below average in two of the three years with the latest mid-May planting pace: 1993 and 1995. But was late planting the cause of the problem? In 1993, record flooding swamped the crop. Yields fell 18% below normal after a cloudy, wet growing season. Extreme heat during pollination was the culprit in 1995 that cut yields 9% below normal. In 1984, the year that previously had the slowest mid-May progress, yields were actually almost 2% above the projected statistical trend.

Later planting means fewer corn acres will be planted. This one is true. Since 1980 there has been a modest but statistically significant correlation between planting pace and a gains or losses in corn acres. The pace of planting by mid-May accounts for about a quarter of the variance in final planted acreage compared to intentions surveyed in March.

Depending on the time frame studied, the slow pace of planting in 2013 could mean acreage falls 2% to 4.5% below March intentions. The high end of that range translates into a loss of 600 million bushels, assuming the 158 bpa projection used by USDA in its first monthly forecast of production, supply and demand made on May 10. That might be enough to make ending stocks uncomfortably tight for a fourth straight year, depending on demand.

Very slow corn planting means more soybean acres. This is true, but the emphasis on "very slow" is crucial. Overall since 1980s there's no statistically significant correlation between corn planting progress and soybean acreage. But in years when 40% or less of the corn crop was planted by mid-May, soybeans gained acres compared to March planting intentions. This tendency appears to support the notion that when weather permits, farmers will keep planting corn as long as possible, even increasing acreage on occasion.

This year, farmers planted only 28% of the corn crop by mid-May. That suggests a fairly large increase in soybean seedings is possible, 4% above March intentions, or 3 million or more acres. That would add some 130 million bushels to production. The small number of years with very slow corn planting makes this projection tenuous at best. However, USDA's March soybean intentions appeared smaller than those projected by Farm Futures' separate survey of producers, suggesting potential for more acres to turn up in USDA's June 28 update.

Corn prices continue to show divergence between old and new crop futures, with volatile basis making the gap in the cash market even greater.  Old crop basis is at historic levels in many areas, while new crop founders under the potential for larger supplies and higher freight costs. The difference between bids approaches $3 in some areas of the Midwest.

As farmers raced to catch up with planting they stopped selling corn, just as margins at ethanol plants improved and shipping down the river system got going again. July futures remains in a cautious short-term uptrend, though its path since harvest overall is steadily lower.

USDA's July reports, along with growing season weather, should decide how long and how fast cash prices rally. That information will be crucial to turning around the new crop market as well. December futures typically try to put in a bottom in late May or early June. Watch April lows at $5.17 for key support one way or the other.

Lower prices provide opportunities to pick up a few out of the money call options to augment upside coverage from Revenue Protection crop insurance. Owning those calls could make it easier to sell rallies. September or short-dated December options will be a little cheaper, but don't spend more than five to 10 cents.

Soybean prices are also showing a sharp contrast between old crop and new. May futures went off the board at the highest level for the nearby contract since Nov. 2. Though U.S. export sales have fallen to very low levels, end users remain nervous about the potential for labor problems in Brazil to disrupt shipments into the fall. Any exports out of the U.S. this summer would take place at a time when we're supposed to be importing cargoes to keep from running out!

Domestic end users are gradually crushing fewer soybeans, but more rationing will be needed until new crop supplies are available. Producers who planted early beans should demand a basis premium before executing any cash contracts. But if shipments out of Brazil collide with a big U.S. crop this fall, it could make for a very messy cash market here, so be prepared with storage alternatives for the rest of the crop

We previously recommended locking in a price on bushels above the Revenue Protection guarantee. Crop insurance provides a base of support on covered bushels, but patience will be needed to wait for weather rallies. They may come late in the summer, not only on U.S. weather, but to encourage South American growers to boost seedings again this fall.

Wheat prices broke chart support at all three exchanges in mid-May, threatening a break into early harvest lows. Wheat fundamentals aren't especially gloomy here in the U.S., and a serious of weather issues around the world could align to foster a rally. But rallies may depend on demand unless dry weather curtails seeding and yield hopes in the Southern Hemisphere, and hot, dry weather cuts yields out of the Black Sea. Key buyers in North Africa and the Middle East appear to be biding their time, in part because they're strapped for cash.

Last week recommended use of Chicago July $7 puts where needed to provide some additional downside protection to crop insurance. Spring wheat growers likely have a while longer for their market to make up its mind on planting delays, but those who haven't locked in a price on bushels above their Revenue Protection guarantee should do so while the market is above the base price.