PRUDENTIAL SECURITIES, INC.
One New York Plaza, New York, New York
212-776-1000(March 13, 2000) WHEAT: Much like the corn market, the wheat market recovered from the recent lows, but did not have enough support to move back to recent highs. Rainfall in the Plains continues to improve crop conditions as wheat comes out of dormancy, easing earlier production concerns. Although weather and production concerns will continue to provide underlying support, their ability to push the market higher on their own has diminished. Despite recent rains, the wheat regions that were dry last fall and have few reserves will need continued rainfall to maintain the improved conditions. This situation will keep weather in the forefront of the wheat market to some degree until combines begin to roll through the fields at harvest.
Last Friday, the USDA issued updated supply/demand sheets. The U.S. balance sheet was unchanged from the February report with the exception of the average farm price. It reduced each side of the average farm price range by 5 cents per bushel, which reduced the average price to $2.50 from $2.55. Going into the report, some expected the USDA to reduce its export projection as this year's pace is trailing last year's. Some of the slowdown is due to delays in government donation programs. These programs, such as the 416(b), have been tied up in the administration as various agencies decide how much money should be allocated. The level of donations under these programs should approach last year's levels, but may bridge the 1999/2000 and 2000/01 crop years due to the late start. Thus, 1999/2000 export projections could decline in future reports.
The world Supply/Demand report also reflected few changes versus the February report. As expected, Australia's production increase of 1 million tonnes to a record 24.5 million was the most significant feature. Other modest adjustments to production and usage resulted in a decrease in world ending stocks of 370,000 tonnes. The next feature for upcoming reports will be the development of U.S. and Chinese wheat crops. Both have been under less-than-ideal conditions, making the weather in each region more important to the market over the next several months.
Enrollment in the government programs has slowed considerably in the last month due to lower LDPs and fewer bushels still eligible for the programs. We expect the current pace to continue, with most of the activity centered in the northern states, where interest remains high. Final enrollment levels remain on track to exceed 90% on a national basis, but likely will fall short of our high-end projection of 95%. We believe the high enrollment rate in these programs, in particular the LDP, will weigh on prices the next several months if the market does not incur some degree of problems with production. Without this fundamental support, farmers will increase their selling into the market on any modest improvement in prices as they their long cash position prior to harvest.
Beyond rainfall and La Nina, a potential event that could affect long-term weather patterns is brewing. In the Philippines, a volcano has been rumbling and sending volcanic ash eight miles into the sky. This volcano, called Mayon, has not fully erupted but the threat exists. The last time this region had a large volcanic eruption was in June 1991 when Mount Pinatubo sent rock and ash 12 miles into the atmosphere. This eruption put enough ash into the stratosphere that it affected temperatures throughout the world as the amount of sunlight reaching the earth's surface diminished. The following summer, 1992, was unseasonably cool in the United States and led corn yields to rebound to 131.5 bushels per acre from the previous year's level of 108.6 bushels. There also was concern that year that corn would not reach maturity before the first frost due to the lack of heat-degree-days, which determines crop maturity. Wheat was not affected in 1992, but could be this time around if a volcanic eruption occurs earlier in the year than in 1991.
Shawn McCambridge
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