wmeubank@ocp.kcmo.com
(May 5, 1997) WHEAT: Wheat lost 15 cents per bushel last week, continuing the previous week's downward slide. Despite the break, concerns exist over dryness in Europe, notably France and the United Kingdom, where small grains are developing and coarse grains are being planted. Additionally, private analysts have been chipping away at estimates for 1996/97 world ending stocks as they see consumption climbing and production eroding, limiting wheat price losses.
SHORT-TERM OUTLOOK (0-14 DAYS)--Wheat futures will most likely trend higher. Wheat has fallen 42 cents since the highs made just two weeks ago, and ideas that wheat prices are more susceptible to a rally than to further breaks are starting to materialize. Until the European weather situation becomes clearer, production and export prospects for 1997/98 will remain largely unknown. In the United States, traders are focused on damage to the hard red winter (HRW) wheat crop. Although the crop appears to be improving, futures prices will escalate again if damage estimates from last month's freeze creep above the current range of 150-200 million bushels. Also, hard red spring (HRS) wheat planting is lagging the average pace. With prospects of further delays, producers could increasingly switch to alternative crops. From a seasonal standpoint, wheat tends to make its May high in the first two weeks of the month and then grind lower as May turns into June.
LONG-TERM OUTLOOK (15-45 DAYS)--After the typical May high is established, expect wheat to start softening into harvest. By then, the market will have a much better handle on European crop prospects and the status of the HRW crop in the United States. Meteorologists tell us that it is hard to sustain a drought in France and the United Kingdom because the countries are close to large bodies of water and they lack weather-impeding mountain ranges. The market typically overreacts to freezing weather, and this year was no exception, with HRW damage estimated in a wide range between 50 million and 400 million bushels. By mid-May, agronomists will be able to make educated assessments of the actual damage that will replace the wild guesswork at work presently. This week, wheat tours will travel through Texas, Oklahoma and Kansas, as well as into the soft red winter (SRW) wheat areas in the Midwest. The information derived from these tours should be more reliable than the estimates to date because the crop has had time to develop since the freeze a month ago, but be wary of personal agendas that may be promoted on these tours. Expect to see July wheat break the $4 mark and trend lower toward the $3.60-$3.70 level this summer.
TRADING STRATEGY--We are not comfortable being either long corn futures or short wheat futures at current price levels as neither is close to the extreme of their expected ranges. Short hedgers should buy puts and sell calls on Chicago July wheat rather than take an outright short futures position. However, this is only a temporary bias; if wheat is able to muster another 20-30 cents, and U.S. wheat prospects look favorable, we would then advocate short futures positions.
Tom Levis
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