Prepared by Prudential Securities, Inc.

The USDA's November Supply/Demand report contained two changes to theU.S. corn balance sheet that were construed as bearish because they caused1997/1998 ending stocks to increase above the previously tight 781-million-bushelestimate to a more comfortable 928 million. In turn, the stocks-to-useratios climbed from a nervous 8.3% to a more relaxed, but still cautious,10.0%. Taken together, the increase in production and decrease in exportswere the catalysts that caused the corn market to break 14-16 cents perbushel in mid-November and maintain its current weak tone. Longer term,the potential exists for a more volatile, bullish situation into 1998.

The USDA pegged 1997 corn production at 9,359 million bushels in theNovember report, up 47 million from the previous month's estimate. If thisforecast holds, then this year's crop will be the third largest in U.S.history, behind the current record of 10.1 billion in 1994/1995 and the9,477 million bushels produced in 1992/1993.

The current yield projection of 126.4 bushels per acre is down slightlyfrom last year's 127.1 bushels. This year will almost certainly be thefourth-largest yield on record, trailing the current record of 138.6 in1994/1995, 131.4 in 1992/1993 and 127.1 bushels last year. Thus, thereis no doubt that this is a high-yielding, large-producing U.S. corn crop.

The final crop size remains in question until release of the USDA'sfinal report in early January, and we would not be surprised to see thecrop size increase due to a slight upward adjustment in yield. Since 1971,the USDA has raised its October estimate above the September estimate 18times; like this year, the yield prediction rose in the November reportin 17 of those years. In the final report, yields increased nine timesin the last 16 years for an average increase of 1.3 bushels per acre whileyields decreased seven times for an average of 0.6 bushels. Thus, the likelihoodthat yield will increase in this year's final report has a slight edgeover a potential decrease. We project that the USDA likely will increaseyields on the final report, but only another 0.5-1.0 bushels per acre,thus raising the 1997/1998 yield estimate close to our forecast of 127bushels. This change would cause the production figure to rise 35-70 millionbushels, and could cause the USDA to adjust the demand components.

Despite our expectation that the yield estimate will rise in the Januaryreport, the figure likely will be of less concern than it was in the threeprevious reports. By January, the market will most likely be focused onfarmer selling and usage rates as opposed to the final tweaking of supply.If, however, the USDA makes significant changes (like it did in 1992/1993and 1993/1994), then the market will most likely respond accordingly.

The second bearish feature of the November report was a 100-million-bushelcut in export demand to 1,925 million. The latest export sales and shipmentdata reveals that the November figure may be optimistic, as it is 7% largerthan the previous year's total of 1,795 million. As of November 1, cumulativeexport sales totaled 532 million bushels, just 67% of the comparable year-earlierfigure of 790 million. Only 244 million bushels were shipped in the firsttwo months of the 1997/1998 marketing year, which means the United Statesmust export an average of 38.6 million bushels per week over the final10 months to meet the USDA's projection. Meanwhile, the four-week averageis only 34.4 million bushels. At the current pace, U.S. corn exports willmiss the USDA's export goal by 183 million bushels, dropping 1997/1998exports down to 1,742 million.

The lagging U.S. corn sales figure is due in no small part to China,which has been an aggressive seller to Pacific Rim countries that usuallyare solid U.S. corn customers. These destinations include, but are notlimited to, South Korea, Malaysia, Philippines and Indonesia. To date,U.S. export commitments to these countries are seriously behind expectations.Table 5 shows that these four countries are expected to import 6.9 milliontonnes of U.S. corn during the 1997/1998 marketing year, yet have onlycommitted to 1.5 million tonnes. Last year at this time, they had committedto nearly 4.0 million tonnes out of the 6.5 million they bought in 1996/97.

China has the freight advantage over U.S. origins, and can also efficientlyship in the smaller vessels that these ports prefer. (In some cases, theports cannot handle the large 52-tonne ships that come from the UnitedStates). Indeed, there is rumor in the market that a large commercial firmis trying to peddle 3.0 million tonnes of Chinese-origin corn, which wouldleave just another 1.0 million tonnes in order to meet USDA's export projectionof 4.0 million tonnes for that country.

U.S. Corn Balance Sheet

We believe that the USDA eventually will make further changes to theU.S. corn balance sheet--all of them bearish. As we have already pointedout, supply could increase another 30-70 million bushels. Normally, thisrise would cause the other demand components to increase as well. However,our models (which already are using larger supply estimates than the USDA's)are having a difficult time inflating demand to the government's expectedlevels. We remain particularly mystified with the USDA's current projectionof 5,625 million bushels of feed/residual demand as our estimate of 5,582million bushels already reflects a larger crop size. Because it is difficultto generate feed estimates as high as the USDA expects based on animalnumbers and a crop of 9,359 million bushels, there must be a much larger-than-normalresidual component. Even if the USDA increases production to 9.4 billionbushels on the final report, we do not anticipate a further increase infeed/residual demand; if anything, this number is still too large and couldbe reduced by 40-50 million bushels, which would fall directly into carryout.

It is hard to quibble with the food/seed/industrial (FSI) demand component.This demand area is normally stable, and eventually the USDA estimatesare adopted--at least in an effort to back into the feed/residual figureonce exports are known. The larger FSI figure this year versus last probablyreflects the normal 2.5%-3.0% growth, plus a little catch-up as one majorethanol producer likely will increase production toward capacity aftercutting back last year. We are projecting 1997/1998 FSI demand at 1,747million bushels versus USDA's current estimate of 1,775 million. However,if the USDA does not lower its projections, then we likely will increaseours by 28 million bushels because there is no official weekly measureto refute the USDA projection. Ultimately, the market works with the USDA'sfigure. But, at this point, we are content to wait and see what develops.

When all the potential changes are accounted for, it seems the riskto the 1997/1998 U.S. corn balance sheet is for ending stocks to grow,not shrink. We project ending stocks will exceed 1.0 billion bushels andwill approach our estimate of 1,022 million bushels. If exports continueto lack enthusiasm, then export demand could decline another 50-100 millionbushels, which would trickle directly into ending stocks. Our current projectionfor the 1997/1998 stocks-to-use ratio is 11.0%, a full percentage pointabove the USDA's current estimate. However, this remains an historicallytight ratio and leaves very little margin of error for production shortfallsin 1998.

A swing factor in the old-crop balance sheet is the potential for SouthAfrican corn production to have El Nino-linked problems in 1998 that wouldtranslate into greater U.S. export potential. However, the increase probablywould not exceed 500,000 tonnes, or about 20 million bushels. Additionally,the possibility exists that China may yet import corn, most likely fromthe United States. As an offsetting negative factor, Eastern European cornrecently has made inroads to traditional U.S. customers. So far, salesappear to be less than 200,00 tonnes, but the willingness and ability ofEastern Europe to export corn could result in that figure increasing toas much as 2 million tonnes.

The USDA cut its 1997/1998 world production and disappearance estimates,and the ending stocks figure rose to 65.25 million tonnes from October'sforecast of 63.7 million tonnes. The more plentiful ending stocks tookaway some of the market's edginess by causing the rather tight world cornstocks/use ratio to grow to 11.1% from 10.8% as estimated in October. Althoughstill tight from a historical measure, the latest designation seems comfortingdespite the need for solid production in 1998/1999. The most significantchange, of course, was the 3.75 million tonne increase in U.S. ending stocks.However, this stocks rise was partially offset by a 1.5 million tonne decreasein Chinese ending stocks to 20.0 million.

China

'China is an enigma' is the famous saying. And, the puzzle continuesin figuring out 1997/1998 corn production and consumption. It is no longerfront page news that the Chinese Corn Belt suffered its most severe droughtin fifteen seasons this year, causing ending stocks to fall to 20 milliontonnes, the lowest level this decade. Additionally, the current stocks-to-useprojection of 15.8% is easily the tightest since the early 1980's. Yet,Chinese corn exports continue unabated, and are approaching their highestlevels since 1993/1994 when Chinese supplies reached record levels of 129.5million tonnes and exports topped a whopping 11.8 million tonnes. The differencethis year is that supplies are not at record levels. Hence, there is alot of speculation that when the Chinese export program is finished, Chinamay import corn (probably from the United States) at the tail end of theyear. At this point, there is no clear picture as to what may happen andcertainly no clear consensus in the trade.

Typically, China can be either a significant importer or exporter inany given year. However, it rarely exports and imports significant quantitiesin the same marketing year. China has not exported more than 3 milliontonnes and imported more than 1 million tonnes since 1986/1987. Unlike1986/1987, when China exported 3.8 million tonnes and still ended up importing1.6 million tonnes, the current balance sheet is much tighter. Ending stocksare 3.6 million tonnes larger than in 1986/1987, but demand gains of 46.5million tonnes have caused the stocks-to-use ratio to tighten by 5.6 percentagepoints. In 1986/1987, China produced 93 million tonnes and used 76 million,ending with a stocks-to-use ratio of 21.4%, a far less tight situationthan currently projected.

One interesting theory (that cannot be confirmed, but does make economicsense) is that China may be exporting corn to take advantage of relativelyhigh harvest prices with the intent of importing later once prices movelower. The reason that this is reasonably logical is that corn prices havebeen 40-50 cents higher than normal during the U.S. harvest, even thoughit appears to be the third largest on record. Additionally, China producescorn in Manchuria and the North China Plains, but consumes most of thecorn further south where the livestock sector is predominantly located.Because the country's logistical infrastructure is not very well developed,it is a large task to move grain from producing regions to consuming regions.Often the best means of achieving this balance is to export corn from thenorth and import corn into the south. If this export now/import later theoryis correct and prices do drift lower later this year, then China conceivablywould have been able to export corn at higher price levels than those paidfor corn that they would import later in the year.

If China imports corn this season, it would most likely turn to theUnited States, thus shoring up the U.S. corn export program. China couldbe in for as much as an additional 1.0 million tonnes more than USDA currentlyprojects, raising eventual Chinese imports to 1.25 million tonnes. Thatwould increase China's ending stocks to 21 million tonnes and cause thestocks-to-use ratio to rise to 16.6% from 15.8%. A Chinese corn supply/demandbalance with a 16.6% stocks/use ratio is tight from an historic standpoint,but is certainly ample.

South Africa--El Nino Or Not?

It may still be premature to start slicing production due to hot anddry conditions in South Africa. Corn is normally planted from late Septemberthrough late December, but plantings were only about 5% complete at mid-November.The USDA currently estimates 1998/1999 South African corn production at8.5 million tonnes versus 9.0 million last year.

The El Nino effect is fairly strong and can wreak havoc with South Africancorn production. The last two major El Nino events (1991 and 1994) cutSouth African corn production by 5.0 million and 8.5 million tonnes, respectively;the 1987 El Nino had no impact on production. Thus, even if the correlationis not perfect, El Nino can have a dramatic impact on the South Africancorn crop. This year, it is a waiting game to see what develops with weather,and until then, any forecast changes by the USDA should be minimal.

If production is reduced due to El Nino, then South Africa may not bea substantial exporter of corn. Typically, South Africa exports whatevercorn is produced beyond its domestic needs of 7.8-8.0 million tonnes. Overtime, this has equated to roughly 1.0 million tonnes of corn each year.However, in 1994 and 1991, exports dropped off almost entirely while importsexploded. In 1991, South Africa exported no corn and imported 4.0 milliontonnes; in 1994, it sold 125,000 tonnes and bought 600,000 tonnes. Productionproblems this year could fortify the U.S. corn export program.

South America

Although better known for their soybean crops, Argentina and Brazilalso are major corn-producing nations. Argentina is routinely followedby the trade, and the USDA religiously releases supply/demand projectionsfor that country. Brazil is not nearly as important to the trade, despitethat it routinely produces almost three times the amount of corn that Argentinadoes. The difference is that Brazil is not a world market factor becauseits feed grains are absorbed domestically. Indeed, Brazil turns to Argentinaeach year for additional imports in order to meet domestic livestock needs.But, to the extent that Brazil needs larger imports from Argentina dueto production shortfalls, then Argentina has less corn available for theexport market. Thus, Brazilian corn production prospects are importantto monitor. Currently, the USDA forecasts Argentina will produce 13.0 milliontonnes of corn in 1997/1998 while Brazil is down for 34 million tonnes.For the upcoming season, which is still in the planting stage, Argentinais projected to plant 3.790 million hectares, down 5% from last year's3.985 million; as of November 13, Argentine corn planting was 70% complete.Brazil is projected to plant 1.521 million hectares versus 1.698 millionlast year and was about half done at mid-November.

As soon as the calendar flips to 1998, the market will begin focusingon U.S. corn production prospects for the 1998/1999 season. Before theFreedom to Farm bill (passed in 1995), U.S. farmers were constricted toplanting according to farm programs, and market prices usually were academicto them. Now, U.S. farmers have a wide degree of latitude in making grainplanting decisions. This will be just the third season that U.S. producerswill be making decisions based upon market signals (and to a smaller extentcrop rotation), and planting intentions models based on pre-1995 conditionshave to be tossed out the window. Thus, to develop meaningful projectionsof 1998 U.S. corn plantings, we have to resort to crop budgets. Currentprice relationships suggest that corn is a better crop to produce nextyear than beans, at least in the Midwest, where 70% of the crop is grown.

As market prices or input costs change, farmers undoubtedly will varytheir planting decisions. Our first stab at a planting number suggeststhat corn acreage will increase from last year's level, likely to withina range of 81.5-82.5 million acres. Using a 92% harvested ratio and a trendyield of 131 bushels per acre, the span of this range equals just 120 millionbushels of production, or 1.3% of the 1997 crop. Obviously, much will changebetween now and when the 1998 crop gets planted (let alone harvested),but the general theme is that ending stocks should grow if the United Stateshas normal weather and 1998 corn plantings are 82 million acres. However,the growth in ending stocks should be slight, topping out around 1,117million bushels, and the stocks-to-use ratio will remain tight from anhistorical perspective.

New-crop yield will be the biggest risk to the 1998/1999 U.S. corn supply/demandbalance. Production changes about 120 million bushels for every 1 millionplanted acres, while it changes by 73-75 million bushels for each bushel-per-acrechange in yield. There are many more likely yield scenarios than plantedacreage scenarios. Even though trend yield is commonly pegged at 131 bushelsper acre, actual U.S. yields have been at or above this level only twice,in 1992 and in 1994.

This uncertainty about plantings and potential yield means that thecorn market will stay nervous and volatile, reacting sometimes violentlyto the latest market concern. The situation will be partially mitigatedif production is on the high side due to increased plantings or better-than-trendyields. Of course, the reverse is true a well: The situation will be exacerbatedif yields falter or if plantings come in below expectations. Expect tosee deferred futures contracts stay relatively supported all the way throughmid-August 1998, when the market will have a good understanding of thepotential crop size.

The corn market could be trapped in a range defined as $2.75-$3.10,basis March, until the end of February. But, there should be some decenttrading opportunities over the next several months.

Short-Term

Corn prices could improve through the holidays due to several factors:(1) the potential for South African crop problems; (2) a possible Chinesecorn import program; (3) a reduced South American corn crop; (4) an historicallytight U.S. corn balance sheet (although we expect it to loosen a bit);and (5) an historically tight world corn balance sheet. Additionally, cornfutures have retraced 25 cents of the initial 40-cent rally that beganin early October, and commercial buying has been very supportive on theway down. However, the fund net long position remains at about 300 millionbushels, most of which is thought to be in the December 1997 contract.Those holdings are large enough to push the market 10 cents lower frommid-November levels, if liquidated. We anticipate that funds will rollmuch of this position to the March contract.

We believe short-term downside risk to March corn is probably limitedto $2.75, while the opportunity between now and early January is limitedto the contract highs of $3.07.

Intermediate-Term

After the holidays are over and the new tax year begins, do not be surprisedto see U.S. farmers aggressively sell cash corn. This is normally the case,but this year the situation could be exaggerated due to light selling atharvest. Also, if exports remain lackluster and with South American suppliesjust around the corner, the futures markets should feel soft and couldtrend lower into early February; probably retracing to near the $2.80 mark,basis March.

Long-Term

Despite the anticipated softness in January and into early February,the market will start to hone in on upcoming production prospects for 1998/1999.Those factors will include the latest 1997/1998 ending stocks projections,planting prospects for 1998 and long-term weather forecasts into the plantingseason. Even the best scenario for 1997/1998 results in an ending stocksfigure of 1,022 million bushels, which is only an 11.0% stocks-to-use ratio.This equals six weeks of supplies and does not leave much room for productionshortfalls in 1998. Hence, expect to see the corn market able to rallyeasily and be well supported on breaks. The U.S. market will be operatingin an environment of tight world stocks as well.

At this early juncture, we have to assume normal weather for the upcominggrowing season. Fears of El Nino-related problems for the U.S. Corn Beltshould have been properly debunked by now. Nonetheless, there has not beena drought in the United States for 10 years, and some market participantsare quick to point out that other long-term drought indicators (e.g., sunspotminima) are coming to a head for the 1998/1999 season.

Whether a drought occurs is beyond anyone's ability to forecast, butgiven all of the nervousness surrounding these markets and the tight balancesheets, prices could very well tend to trade higher than normal throughthe planting season and into the various crop development stages. If thereare production problems, then current corn prices will seem cheap; giventhe tight supply/demand balance, corn could put in a stellar performancethat rivals action in 1995. Even normal yields on average acreage meanthe corn market will remain volatile and at higher price levels until thatcrop is assured.

For commercial users, we recommend looking at buying out-of-the-moneyMay corn calls, but only as disaster insurance. If you are trying to protecta budget that cannot absorb much price risk, then use futures positionsor call options with strike prices that are closer to the underlying futurescontract. Do not handcuff your position by selling calls as a financingtool. Rather, sell a put option at a level that the budgeted purchasingprice can accommodate.

November 26, 1997

Prudential Securities, Inc.

One New York Plaza, New York, New York

Consensus National Futures and Financial On Line Index

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