MERRILL LYNCH & CO.
North Tower, 21st Floor, New York, New York
(November 13, 1997) WHEAT: The wheat market has remained under pressure over the past several weeks as a result of the market's apparent disappointment with the current U.S. wheat export program. However, we maintain an opposing view to that outlook. Exports during the first five months of 1997/98 have undeniably been less than impressive. First quarter (June-August) exports of 277 million bushels were the second lowest of the last five years. With the remainder of November yet to be determined, we are estimating second quarter (September-November) exports at 310 million bushels, just above last year and also the second lowest of the last five years. From that standpoint, in simplistic terms, the disappointment in the market is understandable. However, a broader approach to the situation creates a different picture. Total export commitments as of October 30 were only 4% behind last year's level. However, the record wheat crops in Australia and Argentina last year resulted in heavy front-loading of U.S. exports. First quarter 1996/97 U.S. wheat exports were the largest of the previous six years. With the significant competition for export business from November forward last year, sales and, accordingly, shipments of U.S. wheat dropped sharply thereafter. In an interesting twist to the standard logic, this year's somewhat slow early exports are actually viewed as positive for the longer-term U.S. export program.
Looking again at the export sales data as of October 30, cumulative exports were 488 million bushels, down 9% from last year, yet outstanding sales (sales which have yet to be shipped) at 156 million bushels were up 20% from a year ago at 156 million. This indicates the potential for improved shipments over year ago levels in the future as long as new sales of wheat continue at a decent rate. As November wraps up, we are expecting a similar pace of exports to that which has been seen recently and, accordingly, are estimating second quarter exports of 310 million bushels, in line with last year. From that point forward, the improvement in exports from those in 1996/97 is expected to become apparent.
Last year's third and fourth quarter exports were excessively weak. In fact, total second half 1996/97 exports were the lowest of at least the last 20 years. With outstanding sales of U.S. wheat above last year and reduced competition for export business relative to a year ago expected, a return to more normal export levels over the December-May period is strongly anticipated. As a quick review, the estimated 25% reduction in the Australian wheat crop and the 21% estimated drop in the Argentine crop from last year are expected to result in less competition in the world market for exports in the months ahead. Our current estimate of 1997/98 U.S. wheat exports is 1.165 billion bushels versus the USDA's estimate of 1.075 billion and 1996/97 exports of 1.001 billion. It should be noted that our projection is not based on an impressively strong export program from this point forward, but much rather a simple return to average, if not slightly below average, levels. In fact, our third quarter export projection of 300 million bushels would still be the third lowest of the last seven years, but would reflect a 68% increase over last year due to the above discussed excessively weak shipments during the second half of 1996/97. This improvement over year-ago levels should keep strong underlying support in the wheat market in the months ahead. Upside price potential will likely be a function of exports outpacing these expectations.
Near-term price action in the wheat market is expected to maintain a defensive tone. Until the export situation begins to show improvements over year-ago levels, a general disappointment in the market is likely to keep any upside price action limited. However, we view the current weakness as a longer-term buying opportunity. The timing remains the issue, and with the focus on the export situation, we will stand aside in the near term. We are expecting wheat to see support near the previous contract lows of around $3.50 basis Chicago March futures with longer-term upside potential to the $4.00 level.
(Reprinted by permission. Copyright © 1997, Merrill Lynch, Pierce, Fenner & Smith Incorporated.)
Randy Mittelstaedt
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