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MERRILL LYNCH & CO.
North Tower, 21st Floor, New York, New York
(October 30, 1997) WHEAT: WHEAT COULD BE NEARING A BOTTOM–Wheat prices have maintained an overall defensive tone recently as the market simply is not convinced that decent export demand for U.S. wheat will be seen throughout the remainder of the 1997/98 marketing year. This has been the basis of our longer-term favorable price outlook for the market for some time and is discussed in detail in our recently released October Wheat Bimonthly report. We continue to see no reason to alter that view at this time, as while export sales have not been earth-shattering, they have regularly outpaced the level needed to reach the USDA export projection. There have only been two weeks out of the first 21 weeks of 1997/98 when weekly sales fell below the average sales level needed. That is a pattern which we expect to continue in the months ahead and will eventually result in the USDA's projection proving to be too low. The favorable demand outlook should keep a strong level of underlying support in the wheat market.
AN EARLY GLANCE AT NEW-CROP WHEAT–While much of the market's focus has been on the old-crop situation recently, we will take an early glance at prospects for the newly planted 1998/99 winter wheat crop. Regarding planted acreage, at this time we are expecting acreage at worst to be unchanged from last year's area of 48.3 million acres, and probably will be up slightly from that level. During the planting season, wheat prices were fairly attractive and actually were rallying at that time to around the $4.00 level. Also, weather for planting and early-development was quite good as well. Rainfall in the central/southern plains began to pick-up in early September, just in time to create favorable soil moisture conditions as planting got underway. We are currently expecting winter wheat planted acreage to be around 49.0-49.5 million acres this year which would be up about 1 million acres from last year, but still at least 2.5 million below 1996/97. The first USDA winter wheat planted acreage estimate will be released on January 13.
WINTER WHEAT CROP IS IN GOOD SHAPE–Regarding early crop conditions, as would be expected with the favorable early weather, the winter wheat crop is in rather good shape. As of October 26, 72% of the U.S. winter wheat crop was rated in either good or excellent condition. That is only slightly below last year's crop in late October of 73% and is historically high. Current crop conditions are the third highest of the last eight years, reflecting the favorable moisture situation. While this is helpful, production is really determined by weather conditions during the spring growing season once the crop breaks dormancy. The sizable 1997/98 winter wheat crop was a function of the good weather late in the growing season and is easily seen in the late June crop rating. However, the previous several years saw sharp declines in crop conditions during the spring and resulted in rather disappointing crops. It is far too early to make any reliable production assumptions, but the early good condition of this year's crop is encouraging.
While our view of a decent level of export business continuing throughout the 1997/98 marketing year should ultimately produce higher prices, it is quite obvious the market is not convinced of this scenario at this time. If export sales of wheat continually run above the level needed to reach the USDA export projection, and imply the need for an upward revision in the USDA's estimate, near-term underlying support in the wheat market should be quite strong. Given our longer-term upside price outlook and the unconvincing trade of late, we favor long trading strategies of buying out of the money calls and selling out of the money puts in the March contract.
Randy Mittelstaedt
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