BULLISH HOPES FADE
FOR WHEAT PRICES
Prepared by Richard A. Brock & Associates, Inc.
Keeping a bullish fire burning under the wheat market has been a struggle. Although prices rebounded nicely from a well-timed seasonal low in July, the rally lost momentum in early September. If the lows charted about a month ago are taken out, it will turn the trend from sideways to down. That nearly happened this week.
Why is the wheat market so lethargic? Is there any reason to continue holding a portion of the 1997 crop? And what about hedging 1998 production?
Disappointing Export Demand
Sluggish export sales top the list of reasons why the wheat market has been unable to rally. After getting the marketing year off to a fairly good start, the pace of export business has slowed dramatically the past couple weeks. Last week's sales total was a dismal 7.35 million bushels. That's roughly 10 million bushels below the weekly average needed to reach USDA's projection for the entire marketing year.
It's doubtful USDA will make a significant downward adjustment in its wheat usage estimates in Monday's supply/demand estimates. But the trade has clearly shown disappointment in the amount of export business being done for U.S. wheat by favoring the sell side of wheat futures the past few weeks.
What makes the lackluster pace of U.S. exports disappointing is that world wheat stocks remain tight. Although world ending stocks as a percent of usage have risen from a year earlier, the supply/usage ratio is still near the bottom side of the historical range.
Because winter-wheat growers in the U. S. enjoyed the an excellent production year, there are plenty of bushels to work with. It was assumed U.S. exporters would be able to capture more business. USDA's current export projection calls for a 7.4% increase in sales from the previous year. So far this marketing year, exports are running almost 10% below a year earlier.
There is, of course, still time for exports to bounce back. Wheat growing nations in the southern hemisphere will offer less competition this year, although late-season rains in Australia helped the wheat crop there and raised production estimates from earlier this year by a million metric tons or more. The Australian crop is still about 28% smaller than the previous crop. Argentina is also looking at a much smaller crop, with the current estimate down about 21 % from last year.
Puzzling is probably the best word to describe the European Union's stance towards wheat exports. Much to the dismay of the French, the EU's Grains Management Committee has been very stingy with approvals of licenses to export wheat in the open market. The committee has not only been rejecting many free-market export deals, it has also nixed most subsidy-based sales to non-European nations. This should give U.S. wheat exports a boost, but so far it hasn't helped much.
Corn May Be Wheat's Best Hope
If wheat is going to rally, it will probably on the coattails of the corn market. Much of the world is starting to view this year's wheat crop as a feed grain. That's partially because there's a lot of feed-grade wheat around. More important is the fact world feed grain supplies are historically tight. The price difference between wheat and corn is small enough that more people are now starting to look to wheat as an alternative feed source.
Even though corn exports have also been disappointing at times this fall, that market appears to have more upside potential than wheat. If corn takes off on a post-harvest rally, wheat may tag along. But without spillover support from corn, wheat futures will have a tough row to hoe.
1998 Crop Is Off To A Good Start
One of the key unknowns that could come into play and give wheat prices a lift is the production potential of next year's crop in the U. S. Based on current crop condition ratings, it appears the winter-wheat crop will go into dormancy under very little stress.
The winter-wheat crop was seeded on schedule this fall and has gotten off to a good start in most areas. According to this week's crop ratings from USDA, 75% of winter wheat acres are in good or excellent condition.
Moisture is not a concern at this point, especially in the Central Plains. The heavy snow that blanketed that area two weeks ago provided hard red winter wheat fields with all the moisture they'll need between now and dormancy. The scattered rains that have been making their way across the Midwest and South have left the soft red winter wheat crop in good shape. A supply-driven rally is unlikely until late winter at the earliest, when winterkill concerns become possible.
Does It Ever Pay To Store Wheat?
Not very often. As shown on this graphic, wheat prices seldom improve enough to cover the “cost” of hanging onto the grain, even when on-farm storage is used. In the past ten years, there have been four rallies strong enough to lift cash-wheat prices above the average price in June adjusted for carry.
By the way, this example assumes a 4 cent per month cost of carry. Kansas State University recommends a 4½ cent carrying charge, including 2½ cents for on-farm storage.
The break from the pre-harvest price was particularly severe for hard-red-winter wheat this year for a couple of reasons. It was a big crop and transportation problems widened cash basis more than normal.
If wheat growers who store the crop are going to get back to “even” with pre-harvest prices, the market needs to rally nearly 40 cents over the next 60 days. We do not see that kind of rally potential. We marketed the first 60% of the crop with two pre-harvest cash sales, two sales during the August rebound and one in early September. Be prepared to pull the plug on the other 40%. Based on the fundamental outlook, we will soon be recommending the sale of the rest of the 1997/98 wheat.
Our trigger price for new-crop hedges has been support near $3.73 on the daily chart for Chicago July futures. If that early-October low is taken out, it will be a strong indication the trend has turned down.
November 7, 1997 Richard A. Brock & Associates, Inc.
2050 W. Good Hope Road, Milwaukee, Wisconsin
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