PRUDENTIAL SECURITIES, INC.
One New York Plaza,
New York, New York

(June 9, 1997) WHEAT: Supply/Demand report on June 12: Export demand, currently estimated at 985 million bushels, is the only statistic we expect to change in the old-crop Supply/Demand report.

We look for an increase to 1,010 million because although the latest export inspections were reported at 973 million bushels, there is the equivalent of another 27 million bushels of flour and 6 million bushels of wheat products that must be added to the mix.

(The USDA is required to use the census figures and may not pick up all of the inspections.) However, even at 1,000 million bushels, this is an insignificant change in total demand. If the USDA increases the export figure. the old-crop carryout would decline by 15 million bushels to 450 million, and the stocks-to-use ratio would fall to 19.6% from 20.4%.

The USDA is projecting 1997/98 production at 2,261 million bushels, based on 61 million harvested acres and a yield of 37.1 bushels per acre. Although the USDA likely will leave the acreage figure unchanged (opting to wait for the June 30 Acreage report), the yield estimate may well increase because crop conditions have improved to 96% of normal from 94.8% since the previous Supply/Demand report. We are projecting not only a slightly higher yield of 38.2 bushels per acre, but also 500,000 more acres for a production estimate of 2,349 million.

New-crop domestic demand is currently estimated by the USDA at 1,260 million bushels, down 38 million versus last year because of an expected 50-million-bushel drop in feed/residual demand resulting from low feedgrain prices. Currently, hard red wheat in Texas is priced suitably for inclusion in feed rations, but feeders prefer to switch into wheat only when they expect the price relationship with feedgrains will continue for an extended period. With exports pegged at 1,000 million bushels, the USDA estimates 1997/98 demand to total 2,260 million. Thus, new-crop carryout would be 557 million bushels versus 465 million last year, and the stocks-to-use ratio would increase to 24.6% versus 20.4% the previous year. Our 1997/98 demand estimates are quite a bit larger than the USDA's because our supply projections also exceed those of the government.

SHORT-TERM PRICE OUTLOOK: 0-15 DAYS--Although wheat conditions continue to improve and crop development is on schedule, the market may have sold off too fast, too soon. Consequently, the wheat market is in an oversold condition that has increased the odds of a technical rally. From a fundamental standpoint, export demand may increase at current low prices, adding commercial support. Expect to see July wheat retest $3.75 per bushel and then sets its sights on the $3.95-$4.00 area.

LONG-TERM PRICE OUTLOOK: 45-60 DAYS--We expect to see July wheat futures trade lower to the $3.35-$3.40 level prior to harvest. This forecast assumes normal weather conditions, which means that dryness in the Northern Central Plains is alleviated, the Southern Plains is dry enough for harvest to progress at a normal pace and that disease is not a serious issue for the soft red crop.

September wheat has good potential to test contract lows at $3.33 1/2, and could possibly move lower depending upon crop prospects.

LONG-TERM SWING FACTOR--The El Nino phenomenon bears watching because there is a strong relationship between an El Nino and dryness in Australia, which leads to a crop shortfall "down under."

So far, precipitation has been ample for most Australian wheat areas, but more showers are needed over the next several weeks to sustain the crop as it continues to develop.

Tom Levis

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