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(September 22, 1997) WHEAT: Following the September Crop report, the wheat market fell into the doldrums last week. Negative fundamentals, including decent weather for the U.S. spring wheat harvest as well as winter wheat planting, have helped keep pressure on prices. In addition, the export picture remains dour compared to last year's pace. Finally, additional rainfall in Australian wheat producing regions contributed to the weakness. From a fundamental perspective, there is currently little news that can be regarded as price-supportive in the short term.
HARVEST AND PLANTING PROGRESS–The latest weekly crop conditions showed spring wheat harvest nearly complete at 93%, a level that is well ahead of the average of 78%. We anticipate the next report will most likely market the spring wheat harvest's conclusion. Despite a 100% rating, there will be some durum harvest vet to finish. (Durum harvest is not officially measured by the USDA because the crop is small relative to the other wheat classes.) Nonetheless, in terms of potential market impact, wheat harvest is no longer influential to prices this year.
Winter wheat planting is just getting started. The latest Crop Conditions report showed wheat plantings on pace at 15% completed versus an average of 16%. Weather conditions for planting progress are favorable, although additional moisture would be advantageous for the emerging crop. The latest 6- to 10-day weather outlook calls for below-normal precipitation in the northern sections of the winter wheat belt and no precipitation for the southern portions. Overall, the outlook for U.S. 1998/99 wheat production is starting off on a good foot.
EXPORT DEMAND–Unfortunately, export demand for 1997/98 U.S. wheat has not made a stellar start. The USDA projects a 10% increase in total exports for the year, at 29.9 million tonnes versus 27.2 million last year. Export sales thus far in the marketing year are lackluster at best. As of September 11, total commitments to date for the marketing year equated a little less than 14.0 million tonnes, down 1.2 million (or 8%) from the same time last year. Export shipments are even slower. So far this season, the United States has shipped 8.719 million tonnes versus 10.254 million last year over the same number of weeks. The U.S. 1997/98 wheat export program is 29% complete versus 38% for the same time last year.
Typically, the four largest U.S. wheat customers are Egypt, Japan, Philippines and Pakistan. Indeed, they have purchased the most U.S. wheat for the current marketing year, buying 5.6 million tonnes, or 40%, of the 14.0 million tonnes sold to date. Egypt remains the biggest U.S. customer by and has committed to 2.555 million tonnes, double Japan's purchases of 1.274 million tonnes. Pakistan has booked 931 million tonnes while Philippines is at 826 million. However, the EU is expected to become much more aggressive in the export market once they have a better handle on the quality of their crop. If so, the EU could potentially eat into U.S. export business. Additionally, if Australian wheat production prospects improve, then that country could become more formidable in the world export market than currently anticipated.
EL NINO–Australian wheat areas of New South Wales (NSW) and Queensland continue to receive beneficial rainfall that will help sustain the crop as the jointing stage proceeds. NSW received 0.25-0.75 inches last week and are forecast to get 0.25 to 1.0 inches with locally heavier amounts. The rainfall was partly responsible for last week's inability to rally, as the market is interpreting these rains as the Australian wheat crop's salvation. However, as we mentioned in our last report, the peak water usage period is not until the late-jointing- through-heading stage. Those critical stages normally occur from late September through late October. This year, due to the cool weather Australia experienced this winter, the wheat crop is about one week late. Thus, the peak water usage will not occur until October. At that time, the wheat plants water needs increase very quickly, from a few hundredths of an inch per day as the crop breaks dormancy and enters early spring growth to a high during the heading stage of 0.35 inches per day.
In October, the market will be focused on both temperatures and rainfall. Normal rainfall in NSW and Queensland is 2.0 inches during October; the average temperature normally is in the low- to mid-80s. Current temperatures have risen slightly (but only to normal) and are not a threat at this point. The short-term forecast does not show hot temperatures as a threat either.
Rains over the last two weeks have caused some analysts to raise their Australian production estimates closer to the USDA's projection of 16.0 million tonnes. In addition, sentiments are growing that if these rains continue on a timely basis, the Australian wheat crop could reach 17.0 million tonnes. This level of production would be well tinder last year's record crop of 23.6 million tonnes, but the second largest since 1985 and very respectable from a historical perspective. If the Australian wheat crop is able to avoid the typical devastation wrought by an El Nino, then Australia should be able to maintain its projected export program of 13.0 million tonnes. October should be a pivotal month, with weather either slashing production prospects below 15.0 million tonnes or solidifying them above, 16.0-17.0 million.
U.S. futures prices will be heavily influenced by U.S. weather, EU aggressiveness in the world export markets and El Nino's impact on Australian wheat production. The market currently feels the brunt of all these bearish fundamentals, but we believe it will be a short-term phenomenon. Longer term, the December contract still has excellent prospects of testing and breaking resistance at both $3.98 per bushel and $4.05, and could possibly test the $4.25 mark. Unfortunately, a rally of this nature would require other countries to have some misfortune that would allow U.S. exports to expand.
Tom Levis
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