PRUDENTIAL SECURITIES, INC.
One New York Plaza, New York, New York
212-778-1000
(March 27, 2000) WHEAT: Wheat was responsible for much of the late-week pressure in the corn market as rainfall hit the driest regions of the southern Plains and added to the totals already received in the higher-producing Plains areas. Suddenly, participants in the wheat market moved from talking about the degree of crop losses to how big the crop may become as a result of the change to a wetter weather pattern. While agreeing that the recent rains and the forecasts for more will greatly improve the crop, it still is a long way from the bin. The most recent bearish attitude could just as quickly return to a more bullish stance as if dry weather returns to the region later in the growing season and raises production concerns. This week, however, the market will be focusing mostly on Friday's USDA reports for stocks and plantings.
The weekly state ratings reflected the benefits of recent rains in the Plains. In Oklahoma, good/excellent ratings rose to 73% from 63% the previous week. Improvements also took place in Colorado, with 71% good/excellent versus 64% the previous week, and in Kansas, with 44% good/excellent versus the previous week's 42%. The only state showing further deterioration was Texas, with its crop declining to 66% poor/very poor versus 64% the previous week. The Texas crop rating should show vast improvement this week following last week's significant rainfall.
These crop condition reports also showed significant improvements in subsoil moisture levels. Oklahoma reported 81% of the subsoil holds adequate to surplus moisture. Colorado and Kansas have subsoil moisture levels at 70% adequate/surplus. These ratings have vastly improved over the last several weeks and should provide good moisture reserves for the wheat crop in these states even if the weather does return to dry conditions.
With prices retreating to recent lows and possibly threatening the contract lows, we expect an increase in export interest. Total commitments equal to 84% of the year's export projection trail last year's pace of 87% at this time. When prices have neared current levels in the past, demand surfaced from end-users. In addition, there seems to be more demand to be filled, which may support prices later this week if customers want additional coverage before the USDA reports are released.
If good growing conditions continue in the Wheat Belt, prices will continue to be pressured as the market's function will turn to finding demand to reduce the large supplies. We mentioned in the corn comments that one possible scenario would be an increase in wheat feeding prior to harvest. Barring some degree of wheat production loss, we expect wheat to begin entering feed rations in the hard wheat regions prior to harvest. Pressure on already low basis levels will narrow the cash spread between local corn and wheat, encouraging feeders to switch to wheat for at least one cycle. This will not be a cure for the large supplies as the potential feed use should total 25-75 million bushels. Indeed wheat feeding may affect the corn market more than wheat as any additional wheat feeding would be at the expense of corn. We believe it will be difficult to reduce wheat stocks without production problems in the United States or another major producing country.
Figure 3
Monthly Wheat LDP Entries
(million bushels)
Source-USDA
Enrollment in the government programs is beginning to wind down mainly because 89% of the crop already has been entered. If enrollment reaches our projection 95%, then 138 million bushels would still be placed in either the loan or LDP program. Increases last week continued the last month's pattern western wheat states taking the lead. Reported LDP enrollment increased 3.7 million bushels last week, with the following additions: 969,640 bushels in North Dakota; 390,817 bushels in Idaho; 312,627 bushels in Kansas; 309,681 bushels in Oklahoma; and 444,976 bushels in Washington. The monthly enrollment level has fallen below last year's comparable level (Figure 3) because of the large, early enrollment due to attractive LDP rates following harvest. Total enrollment exceeds last year's level by a wide margin (Figure 4). Increased use of the LDP has put significant ownership of wheat into farmers' hands. In addition, producers already have redeemed 35% of their new-crop loan entries, putting an additional 52 million bushels back onto the market. Unless a fundamental change, such as production problems, support higher prices, increased farmer selling will limit the upside potential of any rallies into harvest.
Figure 4
Year-To-Date Wheat LDP Entries
(million bushels)
Source-USDA
Last week's rainfall has changed the attitude toward the wheat markets from supportive to defensive. Past concerns about possible production problems gave way to prospects for yet another year of good production. This attitude pressured the market into last Friday's session despite recovering trade in the other pits--the first logical market activity all week. Rain moving through the Wheat Belt has significantly improved the crop's condition and soil moisture levels, which will help sustain the crop if dry weather returns. For now, the market will remain on the defensive, limiting any prospect for price recovery until conditions indicate the crop may once again be threatened.
The recent change in market attitude will extend the low end of our prices estimate as the market will seek a price level that increases demand. If conditions remain favorable for the developing crop, we believe the May contract already has seen its high, and the contract low will be vulnerable over the next couple of weeks. Last year, the May contract fell 45 cents per bushel from its spring high into expiration. A similar move this year would put the May contract low near $2.40, which we think will mark the low into expiration.
The July contract should react in similar fashion: With production concerns easing, the market will not likely threaten the February high of $2.92-1/2 unless hot/dry weather returns to the wheat producing regions. The July contract posted similar activity last year when it reached its winter/spring high in late March and slid 77 cents into expiration. A similar-sized move would bring the July contract toward $2.18 into expiration this year as the burdensome U.S. balance sheet weighs on prices. The one caveat to this outlook would be the corn market. Last year, corn prices were collapsing as the July wheat contract approached expiration. If the corn crop has any production problems, we would look for wheat to be supported into the summer. If the corn crop appears to be in the 9,300- to 9,500-million-bushel range, we look for corn prices to collapse as farmers liquidate old-crop corn following pollination of this year's crop. Under this scenario, wheat would follow corn lower and likely achieve the low end of our price projections.
Shawn McCambridge