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PRUDENTIAL SECURITIES, INC.
One New York Plaza, New York, New York
(November 10, 1997) WHEAT: There is not nearly as much interest in the wheat Supply/Demand report as there is in corn for two reasons. First, the wheat balance sheet is not as tight as corn's. The USDA projected last month that U.S. wheat had a 27.7% stocks-to-use ratio, hardly a tight situation. The same story is true for world wheat, which carries a stocks-to- use ratio of 21.9% compared to world corn at 10.8%. Second, the 1997/98 U.S. wheat supply has largely been quantified while corn harvest remains about 20% incomplete.
If the USDA makes any changes in the supply/demand figures, they should be slight and not likely to change a bearish situation to bullish. We expect the U.S. wheat feed/residual component to rise somewhat from the USDA's current 325-million-bushel projection to perhaps 330-373 million, but that change might not necessarily occur an Monday's report. Additionally, export demand could be adjusted downward given the recent slack export pace. But, the USDA may opt to wait and see what the European Union does with refunds before slicing U.S. export demand. Another factor influencing exports will be developing weather conditions for the currently dry Chinese winter wheat areas. The USDA might raise Australian wheat production by as much as 1.0 million tonnes to 18.0 million, and increase export demand 500,000 tonnes to 13.0 million. Argentine production may be bumped up 300,000 tonnes, to 1.30 million due to recent rains, which would probably translate into 200,000 tonnes of increased exports. But on balance, we do not expect to see a lot of change in the wheat balance sheet, and those that could occur would probably weigh on the bearish side for U.S. futures.
The current fundamental picture for wheat remains bearish because the world supply/demand balance is far from tight. The USDA is projecting record production of nearly 601 million tonnes, up from the previous record of 588 million set in 1990. Even though demand is expected to reach a record $82 million tonnes, ending stocks continue to grow and will likely reach 127 million tonnes. This is the largest carryover since 1993, when ending stocks reached 143 million. Similarly the stocks-to-use ratio is expected to grow to 21.9% from 18.7% last year to its largest level since 1993 when it was 25.3%. The world wheat market is very comfortable with ending stocks equal to 2.6 months of demand. Taken together, these factors hardly present a price-friendly scenario.
The U.S. situation is even more comfortable than that of the world picture, even with a tightening in the October report versus the month-earlier estimates. The USDA boosted production by 20 million bushels last month, which raised supplies to 3.063 million; a 25-million-bushel increase in demand offset the increased production. The net result was an ending stocks estimate of 665 million bushels, which calculates to a very comfortable stocks-to-use ratio of 27.7 %.
Looking forward into the 1998/99 season, U.S. winter wheat prospects look very good as the weather has cooperated nicely with planting, emergence and predominancy establishment. The crop rating index indicates that the wheat crop likely will establish a good stand prior to dormancy, which will benefit the crop in the spring when dormancy breaks.
A final bearish plank is that U.S. exports probably will have a tough time meeting the USDA's current 1997/98 export projection of 1.075 million bushels. This appears to be an ever-increasing possibility, given the upward revisions in estimates for Australian and Canadian production as well as the European Union's ability to subsidize wheat when it is most advantageous to their own interests. Recent Export Sales reports continue to illustrate that the U.S. export program is off to a fair start at best, and the closer we get to southern hemisphere harvest, the dimmer the outlook becomes. We expect all of these factors to translate into greater possible U.S. carryout in 1997/98 than currently projected. Both the U.S. and world wheat situations look a lot less tight than their counterparts for the corn market. Eventually, prices should reflect this situation. The major swing factors for wheat are the current dryness across the Chinese winter wheat belt (mainly Manchuria and northern portions of the North China Plains) as well as any dynamic moves in the corn and bean markets. We expect wheat to remain under pressure for at least the next couple of weeks, barring any surprises on Monday's report. December wheat has the potential to penetrate support at $3.53 per bushel and $3.48½ and could potentially move into the low $3.40's.
Tom Levis
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