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PRUDENTIAL SECURITIES, INC.
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(August 11, 1997) WHEAT: Operating in a news vacuum, the wheat market essentially reacted to the dynamics in corn last week. For the week, wheat futures gained about 7 cents per bushel. The only supply/demand components up for serious debate in Tuesday's report are the size of the spring wheat and durum crops. The USDA last projected 1997/98 total wheat production at 2,431 million bushels, of which 1,781 million was winter wheat, leaving 569 million as other spring wheat and 81 million for durum. The market expects the all-wheat figure on Tuesday to show a slight increase at 2,468 million bushels, with the trade range spanning 90 million bushels between 2,427 million and 2,517 million. Spring wheat expectations range between 547 million and 621 million, while durum estimates range between 73 million and 98 million bushels. We are projecting all-wheat production at 2,439 million bushels, of which winter wheat is 1,745 million, other spring wheat equals 610 million and durum totals 85 million.
The biggest potential swing in production could come from spring wheat as that crop is still maturing and progressing through the harvest phase. Recent weather has been less than ideal, with the eastern Dakotas, western Minnesota and Montana staying unseasonably wet. The excess moisture has allowed disease problems to grow as well, impeding harvest. As proof, South Dakota is normally 15% done with its harvest, but this year is only 4% complete as of August 3. Additionally, the spring wheat crop condition index continues to spiral lower, reaching 92.1% of normal from a June high of 104.5%. Last year at this time, spring wheat was deemed 98.5% of normal. Despite the problems the 1997/98 U.S. wheat crop has experienced, total supplies are projected to reach 2,987 million bushels, their largest level since 1993/94.
The USDA currently is projecting exports at 1,050 million bushels while we are anticipating 1,223 million, mainly due to our forecast for production problems our foreign competitors are experiencing. We are estimating 1997/98 Australian wheat production at 14.5 million tonnes versus USDA's July estimate of 18.5 million tonnes; that drops our estimate of Australian wheat exports to 9.8 million tonnes versus the USDA's July estimate of 13.5 million. This reduction in exportable surplus accounts for a significant part of our increased estimate of U.S. exports. Canada also has been having problems with adverse weather, prompting reputable sources to sharply cut Canadian wheat production estimates to 21-22 million tonnes versus the USDA's July estimate of 25.5 million. In Tuesday's report, the USDA will most likely lower both Canadian production and exports to reflect the persistently dry weather in Saskatchewan and Alberta. As mentioned last week, Argentine wheat prospects continue to look less than favorable as planting is being impeded by excessive wetness in Buenos Aires and dryness in Santa Fe and Cordoba.
We do not expect that the USDA will necessarily reflect all of the foreign problems we have anticipated, particularly the Australian shortfall. Simply, it is a little too early for the USDA to make radical adjustments; it may opt to wait and see if the El Nino really causes the damage that we are rejecting.
ANALOGUE YEAR: 1994/95–Over the last 15 years, 1994-95 stands out with supply/demand statistics very similar to our current projections for the 1997/98 year. Here's how closely they compare: (1) harvested acres, yields and exports yields were within 3% of each other; (2) our projected total supplies of 2,987 million bushels is within 6 million of final production in 1994/95; (3) total demand three years ago was within 1% of this year's forecast; (4) ending stocks were within 3.25%. and (5) the stocks- to-use ratio in 1994/95 was 20.5% versus our projected 19.6%. To top off the similarities, both year are El Nino years.
Price action from early August through fall in 1994/95 showed December made a low of $3.44 on August 10 and then rallied 75 cents to an October (and contract) high of $4.19. This year, the August low to date for December futures is $3.63; adding 75 cents yield a potential fall high of $4.38. This projection is very close to our long-term objective of $4.25 for the December contract.
Tom Levis
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