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PRUDENTIAL SECURITIES, INC.
One New York Plaza, New York, New York
(December 8, 1997) WHEAT: The wheat market started off last week's trade very strong, making the week's high on Monday. The buying was based mostly on technical considerations, including the penetration of resistance at $3.60 per bushel, basis March, and formation of a rounded bottom in that month. Weakness appeared later in the week from fund selling and a soft soybean complex. Fundamentals, which remain bearish in the big picture, were not much of a feature in last week's market action.
BEARISH FEATURES–Loose U.S. And World Balance Sheets–Current USDA projections show very comfortable world and U.S. supply/demand projections. In the United States, the stocks-to-use ratio remains large at 27.2%, the highest figure since 1990/91 when it topped at 35.7%. The world stocks-to-use ratio is projected at 22%, which is the loosest since 92/93 when it was 25.3%.
Large Deliverable Stocks–Total stocks in deliverable position against Chicago contracts are the second largest in 15 years. The fastest growth has been in Toledo, but the trend has risen both there and Chicago for several months. Kansas City and Minneapolis stocks also are large, far surpassing levels seen last year at this time, which should help keep spreads under pressure. As of Thursday's close, the December/March spreads had lost 2 cents in Minneapolis and 1 cent in Kansas City versus the previous week; Chicago was flat.
U.S. Winter Wheat Crop In Excellent Shape–U.S. winter wheat prospects look very good as the weather has cooperated nicely with planting, emergence and pre- dormancy establishment. Emergence is 94% complete versus 96% last year and 93% average. The latest crop index showed the U.S. winter wheat crop at 104.4% of normal. This is below last year's rating at that time (105.3%) but still indicates the crop is in very good condition.
Slack Export Pace...But Possible Signs Of Life?–The slack U.S. export pace, which is lagging exports versus the same time last year, has been weighing on the markets. The latest export inspections show that 577 million bushels have been shipped out of a projected 1997/98 export program of 1,075 million. With a little more than half the year to go, the United States needs to export 18.9 million bushels per week to make the USDA's export projection. The current four-week average of 18.1 million still lags the weekly average needed to make the goal, yet since bottoming at 16.6 million bushels the week before Thanksgiving, the four-week average has been improving.
BULLISH FEATURES–Chinese Winter Wheat Crop Still Too Dry–Chinese wheat production in 1997/98 was huge at 121 million tonnes. Ending stocks are projected to be the highest since 1984/85 at 33 million tonnes and the stocks-to-use ratio of 29% is the largest since 1985/86. As a result, Chinese wheat imports are projected to be the lowest since the 1970's. Typically, China imports wheat from the United States. Therefore, with low imports projected, U.S. wheat exporters will have to look somewhere else for business.
The 1998/99 winter wheat crop in China has suffered from excessively dry conditions left over from the summer drought. Chinese winter wheat is grown in roughly the same area as the corn crop, and soil moisture levels are very low. Additionally, it seems that chances are poor that soil moisture levels and reservoirs used for irrigation will recharge this year. Chinese wheat prospects could become a long-term friendly feature.
SWING FACTORS–There is risk to the Argentine crops as harvest continues. Argentine wheat harvest is now estimated as 13% done versus 23% last year. Excessive moisture now could cause problems with harvest and decrease quality. So far this year, Argentina has suffered from drought in Santa Fe and excessive moisture in La Pampa; both provinces are important wheat-producing areas, but account for just 25% of total Argentine wheat production. In Buenos Aires, where 60% of the crop is produced, harvest is just getting underway, but conditions are good. Nonetheless, weather risk remains a swing factor at this point.
As mentioned earlier, Chinese winter wheat areas have received beneficial rains, but more are needed for the crop to develop normally.
PRICE PROJECTIONS–The overall wheat situation is bearish. Both the world and U.S. balance sheets are far from tight, and any likely changes to the U.S. figures would only make the situation even more comfortable. However, the technical picture has improved as wheat appears to have built a rounded bottom. The market's technical condition along with signs that exports are trying to improve cause us to maintain a speculative long position at $3.60, basis March, with an objective of $3.75-$3.85; we are maintaining a tight stop at $3.52. We recognize that the fundamentals are negative, yet this position could represent a short-term opportunity to profit strictly from a technical sense.
Longer term, we remain bearish. Most of the bearish fundamentals are not likely to change soon. We are content to stay sidelined form a long-term perspective. Until fundamental rationale justifies establishing a long position.
Tom Levis
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