wmeubank@ocp.kcmo.com
PRUDENTIAL SECURITIES, INC.
One New York Plaza, New York, New York
(December 15, 1997) WHEAT: Nearby wheat prices lost 16 cents per bushel last week, took out key support in the process and came close to testing contract lows. Although the basic fundamental picture has been bearish (and there is little reason for this to change in the short term), the market was waiting to see if there would be any alterations in the USDA's Supply/Demand report. The only change in the U.S. wheat supply/demand balance was a 5 million bushel decline in imports to 90 million from 95 million that caused ending stocks to decline a similar amount, to 650 million. Still, the stocks-to-use ratio is a very comfortable 27%, down just slightly from 27.2% in the November report. Because the trade was not expecting to see many changes to the U.S. balance sheet, Thursday's report was considered neutral.
However, there were several changes in the world supply/demand estimates. Keeping with the recent trend, the USDA raised 1997/98 world wheat production 1.6 million tonnes to 604.65 million. This was achieved by increasing Argentine production to 13.2 million tonnes from 12.70 million, Australian production to 18.0 million from 17.5 million and Canadian production to 24.3 million from 23.5 million. Partially offsetting these increases, the USDA reduced EU wheat production by 500.000 tonnes to 95.3 million tonnes.
Total world demand increased 700,000 tonnes to 584 million, of which 500,000 tonnes was attributed to an increase in Australian wheat feedings. That rationale makes sense because projected supplies are higher than previously thought; however, the increase may be of lower-than-normal quality. Of the major exporting nations that compete with the United States, both Argentina and Canada are expected to export an additional 500,000 tonnes, raising 1997/98 export projections to 9.2 million tonnes and 18.5 million tonnes, respectively. Meanwhile, major importers (principally Russia) are only expected to take mi additional 200,000 tonnes. With increased production prospects and geographic advantage, Kazakhstan will most likely be the origin for the extra Russian imports.
The net result for the world supply/demand balance is that 1997/98 carryout increased about 700,000 tonnes to 129.25 million and the stocks-to-use ratio ebbed upward slightly from an already comfortable 22.0% to 22.1%. This is in step with recent revisions and continues to paint a market scenario that does not show a pressing need to get long.
PRICE OUTLOOK–SHORT-TERM–The wheat market continues to lack supportive fundamentals. Recently, exports appeared to have firmed, but that may have faded or not be deemed as important as the overall picture, which has predominantly negative features. The short-term direction in wheat is definitely negative. However, the market could be ripe for a correction it' the technical indicators become oversold. Expect to see some support at contract lows of $3.43¼, basis March. As a swing factor, keep an eye on export business–if the United States is the dominant origin, wheat may be able to find some firmer footing, at least short term.
LONG-TERM–Over the next two to three months, the picture continues to lack friendly features. Most of the fundamentals we see are negative and longer term in nature, thus should not be changing any time soon. We do not see a pressing need to step in from the long side at this point.
Tom Levis
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