–U.S. wheat crop forecast shaved slightly.

–Prices bounce up from early harvest lows.

–World wheat production forecast record large, but competitors' crops down.

–U.S. wheat quality is reportedly good, HRS protein premiums flatten.

–U.S. winter wheat planting underway for 1998; soil conditions favorable.

–Sixteenth CRP signup set for October- November.

With the U.S. wheat crop nearly in the bin, the market has turned its attention to Southern Hemisphere production and unfolding export demand. In late summer, prospects for smaller crops in major exporting countries buoyed farm and futures prices, which had sunk dramatically during the bumper U.S. winter wheat harvest. Uncertain crop prospects in Australia and Argentina will continue shaping the near-term price and export outlook. The U.S. crop is the largest crop in 7 years, and grain quality is reportedly good.

USDA forecasts the 1997 crop at 2.51 billion bushels, up 10 percent from last year and the fifth largest on record. Compared with the August forecast, production is revised down 24 million bushels for "other" spring wheat. Lower yield prospects in North Dakota, South Dakota, and Minnesota offset gains in Montana and Washington. The durum production forecast is unchanged from August (see the August 1997 Wheat Outlook), while the winter wheat forecast is carried forward.

The 24-million-bushel production decline is reflected in lower ending stocks, now forecast at 671 million bushels, but still up sharply from 444 million in 1996/97. The rest of the balance sheet is unchanged from last month. Based on this month's decline in expected ending stocks and relatively strong grower prices during June-August, the forecast season-average farm price was raised from $3.05-$3.65 per bushel in August to $3.20-$3.70. This is down from $4.30 in 1996/97.

Year-over-year exports are forecast up 10 percent due to production declines in major foreign exporting countries. Food use continues its steady growth of 1 percent. Feed and residual use is down 11 percent due to improved wheat quality and lower corn prices than a year earlier.

Despite a lack of major export news and prospects for a sharp year-over-year increase in ending stocks, wheat futures advanced in late July and August, reportedly fueled by speculative buying. But with the market becoming increasingly impatient for export demand, prices have moderated. The export pace has picked up slightly in recent weeks, but wheat inspections (for export) remained 14 percent behind a year earlier through September 4.

Unlike last year, December futures are substantially higher than September futures, which provides a strong incentive to hold stocks. This large "carry" reflects the uncertain size of the wheat crops in Australia and Argentina and the potential for increased export demand as the marketing season advances.

Cash wheat prices in major markets showed some strength in late August and early September, reportedly due to logistical problems associated with lack of locomotives. Mill grind through early September was reportedly very active, providing further support.

The next piece of domestic news will be USDA's estimate of September 1 wheat stocks in the Grain Stocks report to be released September 30. The report will provide the first indication of first quarter (June-August) use. Preliminary production estimates (in contrast to forecasts) will also be released for all wheat classes on September 30 in USDA's Small Grains Summary.

World wheat production is forecast record large at 596 million tons in 1997/98, up almost 14 million from 1996/97. In addition to a large U.S. crop, China's summer grain harvest was record large. Projected production in the Newly Independent States (NIS), the 12 countries of the former Soviet Union, is up 20 percent from last year.

Production prospects for the major foreign exporters are lower than a year ago, with combined output of Canada, Australia, Argentina, and the European Union (EU) down 20 million tons. Sharply lower plantings and dry conditions in some areas reduced production prospects in Canada. Dry conditions hurt yield prospects in Australia, while extended planting delays in Argentina reduced area and caused more short season, lower yielding varieties to be planted. Reduced foreign competitor production and increased U.S. supplies allow the U.S. share of world wheat trade to expand in 1997/98. Meanwhile, strong demand from drought-stricken North Africa will support world wheat trade, even with imports declining in China and the NIS.

Projected 1997/98 world wheat production and trade are nearly unchanged from August as changes in different countries are largely offsetting. Lower production prospects for Canada and the EU, especially the U.K., are offset by increased harvests in Eastern Europe, Russia, Mexico, and Brazil. On the export side, lower Canadian shipments are mostly offset by increased prospective exports from Eastern Europe. Meanwhile, among importers, modest reductions forecast for Mexico and Brazil are mostly offset by increased imports expected in Libya and small increases in several other countries. World wheat trade is up marginally from the previous year at 96.5 million tons.

Hot, dry growing conditions this summer have reduced wheat yield prospects in Canada from earlier expectations. Production in 1997 is forecast at 23 million tons, 0.5 million less than last month and down 23 percent from a year ago. The 1996 crop was also revised down 0.7 million tons as Statistics Canada recognized that some fields, especially in Peace River, a northern growing region, had been abandoned after snowfall prevented harvest last fall. The reduced 1997 production was the basis for dropping the export forecast 0.5 million tons to 18.5 million. The 1997/98 forecast is still greater than the 18 million tons exported last year, when a severe winter exacerbated logistical problems in Canada's Pacific ports, limiting exports.

Production prospects for Argentina and Australia should begin to firm up when the wheat harvest gets underway in October-November. USDA forecasts Argentina's crop at 12.7 million tons, down from 16.1 million last year and unchanged from a month earlier. The Australian crop is forecast at 16 million tons, down from 23.6 million last year and also unchanged from a month earlier.

According to the Kansas Agricultural Statistics Service, about 72 percent of the State's wheat samples graded No. 1, up from 55 percent last year and the 5- year average of 43 percent. Average test weight in Kansas has been above average and dockage is relatively low. In the soft red belt, vomitoxin is reportedly a much smaller concern compared with last year. Quality is reportedly good in the Pacific Northwest as well.

Although test weight in the Northern Plains is reportedly down, grain quality has been improving as harvest advances, with the best wheat in western North Dakota and Montana. Scab problems have been reported in the Red River Valley, but protein in this area reportedly averaged well above 14 percent. Dockage was excessive in some areas of the region due to late-season weed growth following July rains.

Back in June, initial reports of low protein wheat in the Southern Plains, along with shriveling prospects for the spring wheat crop, raised concerns that very high protein premiums could persist in 1997/98. But now that the harvest dust is nearly settled, it is clear that high protein wheat was produced in large pockets of northwestern and southwestern Kansas and the protein content of the hard red spring (HRS) crop is well above average. Based on samples representing about 65 percent of the wheat harvested to date in North Dakota, South Dakota, Minnesota, and Montana, the Cereal Science Department of North Dakota State University estimates the protein content at 14.6 percent, compared with the 1996 average and the 1992-96 average of 13.9 percent.

Prospects for adequate protein in the U.S. market for bread flour have led to a decline in protein premiums in recent weeks. The HRS cash price spread between 15 percent protein wheat and 14 percent was 40 cents per bushel on August 1. It dropped to 15-20 cents on August 15, and evaporated completely by early September. In early September 1996, the spread was about 60 cents.

Protein premiums for hard red winter (HRW) have also declined in recent weeks, but in contrast to HRS, they are higher than a year earlier due to lower protein levels in the HRW crop. The average protein content of the Kansas crop is 11.8 percent, down 1.5 points from last year and below the 10-year average of 12.3 percent, according to the Kansas Agricultural Statistics Service. In the second week of September, the premium for 13.6 percent protein wheat was about 25 cents per bushel above ordinary protein. The difference was zero a year earlier.

Despite occasional thunderstorms in the Northern Plains, hot weather in early September has allowed the spring wheat harvest to progress rapidly. As of September 7, the spring wheat harvest was 84 percent complete, slightly ahead of last year and 18 points ahead of the 1992-96 average. All major spring wheat-producing States harvested ahead of the normal pace, especially Minnesota and North Dakota.

Soil conditions are very favorable for winter wheat planting, which is now underway in the Southern and Central Plains. Topsoil moisture in Kansas, for example, was rated 67 percent adequate and 2 percent surplus on September 7. Subsoil moisture was 75 percent adequate and 1 percent surplus. Similar conditions exist in Oklahoma. In the Texas Plains, more rain is needed for germination and emergence.

Generally good planting conditions and relatively attractive new-crop (1998) futures prices at $3.80-$4.00 per bushel bode well for wheat seeding this fall. Nationwide, planting was 5 percent complete as of September 7, down from 6 percent in 1996 and the 1992-96 average of 7 percent. The first forecast of winter wheat seedings will be released on January 10, 1998.

On September 4, 1997, USDA announced that the next Conservation Reserve Program (CRP) general signup will be held during a 5-week period from October 14 through November 14 in USDA Service Centers across the Nation. The Environmental Benefits Index (EBI) system, which is used to rank all eligible CRP offers, was changed for this signup to address concerns arising from the 15th signup and to better protect the Nation's natural resource base. The EBI's wildlife habitat factor is revised to recognize the benefits attributable to vegetative covers planted to address the habitat needs of specific wildlife species. USDA also modified the EBI's air quality factor to reflect more accurately wind speed, moisture conditions, particle size, organic material, and volcanic and organic soils. Except under special circumstances, CRP rental rates will be based on local land rental rates just as they were for the 15th signup, which was held last March.

Approximately 27.8 million acres will be under CRP contracts on October 1, 1997. Just over 4.8 million acres are under contracts that expire next year on September 30. USDA is authorized to maintain enrollment of up to 36.4 million acres.

September 15, 1997 Economic Research Service

USDA, Washington, D.C.

Consensus National Futures and Financial On Line Index

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