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PRUDENTIAL SECURITIES, INC.
One New York Plaza, New York, New York
(October 20, 1997) WHEAT: SHORT- TERM KEY FACTORS–Deliverable Stocks: Deliverable stocks have generally increased in all three markets–Chicago, Kansas City and Minneapolis. The latest report indicated that Chicago deliverables totaled 28 million bushels versus 7 million last year at the same time. Similarly, Kansas City stocks have grown to 46 million bushels from 10 million last year. Minneapolis stocks continue to rise as recently harvested spring grains filter into deliverable position; to date, 15.3 million bushels are reported as deliverable grades versus 13.5 million last year. Large deliverable stocks should keep spreads wide and discourage bull spreading.
Planting And Developmental Progress For Winter Wheat: As of last week, winter wheat was 76% planted versus 71% on average. Recent rains have been very beneficial for the planted crop, yet have not impeded planting. The winter wheat crop is 47% emerged compared to 43% on average, and prospects look favorable for good establishment this fall prior to dormancy. As conditions stand now, winter wheat prospects cannot be considered supportive to prices.
Potential Cash Movement: There has been a lot of concern, particularly in Kansas, that there is not enough storage available for the huge hard red winter wheat crop and this fall's large corn and soybean crops. Also, rail logistical problems and slow demand have slowed the normal disappearance rate in Kansas, thus causing stocks to remain higher than normal. The storage problem is most evident in Kansas, but it exists to a lesser extent in parts of southern Indiana and southern Ohio. The tight storage problem may cause a surge in cash movement in an attempt to get all crops under cover. If so, this action would add pressure to cash prices, which while not wildly bearish to futures, certainly is not bullish.
Fund Buying: Over the last 10 sessions, managed futures funds have been very large buyers in corn and beans. Some wheat traders fear another round of fund buying, but this time in wheat. The latest Commitments of Traders report indicates that funds were net long 7 million bushels as of October 7. Since then, we believe that funds have done little to change their net position in wheat. From a historical standpoint, the fund net long position was as large as 140 million bushels in August 1995, The implication is that further growth of the fund position from current levels would not be unprecedented and should not be an obstacle to further fund buying. This is a potential wild card that should keep the market volatile and nervous.
LONG-TERM KEY FACTORS–U.S. Export Program: The USDA projects 1997/98 U.S. wheat exports at 1,075 million bushels versus 1,001 million last year. However, world production is up 18 million tonnes this year, and the United States accounts for only one-third of the total. Canadian wheat production was raised 500,000 tonnes to 23.5 million tonnes, an increase that filtered directly through to exports, which rose to 18.0 million tonnes. Australian production and export prospects have increased as well. The USDA projects Australia will export 500,000 tonnes more in 1997/98, bringing the total to 12.5 million tonnes. In the European Union, production of 95.75 million tonnes is slightly off the norm, but the EU should still export 33.2 million tonnes of wheat through the use of aggressive export subsidies. To date, the EU has not been very aggressive with either refund levels or volume, but the recent rally in U.S. prices has not forced their hand, either.
The increased competition with U.S. wheat exports occurring at a time when the USDA expects lower demand from major importers. Although the USDA left 1997/98 production unchanged for major importers at 168.8 million tonnes, it cut imports by 400,000 tonnes to 31.25 million tonnes. In essence, these figures suggest that major importers may be less aggressive in buying wheat, particularly when prices are relatively high. The longer it takes for major export demand to increase, the greater the likelihood that the United States will face increasingly stiff competition from southern hemisphere production.
El Nino: Although we have mentioned several times that Australian wheat appears to have escaped the severe ravages dealt by previous El Ninos, the crop is hardly out of the woods. The current month is a critical time period for Australian wheat development, and ample moisture is needed. Moisture during September was very favorable, providing plenty of showers to relieve the very dry conditions in Queensland, New South Wales and Victoria. They also were plentiful enough to help the crop progress through the reproductive stages during October.
Nonetheless, more showers are needed and the forecast is a bit on the dry side. The USDA projects 1997/98 Australian wheat production at 17.0 million tonnes, which is up from its previous estimate of 16.0 million tonnes mainly because of the September rains. As a result, the USDA increased Australia's export prospects by 500,000 tonnes to 12.5 million tonnes. This news is bearish for U.S. wheat exports.
PRICE OUTLOOK–Short Term: The fundamental picture remains negative. Overall, we expect wheat prices to stay under pressure until the fundamental picture improves or funds step in from the long side in either corn or wheat. Barring fund buying, we expect to see December wheat eventually test support at $3.60 per bushel and again at $3.50; testing support at $3.47 cannot be ruled out. Because of the lack of friendly fundamentals, we are not advocating long futures positions.
Long Term: After wheat establishes a short-term bottom, we project the December contract will firm and test the late-August high of $3.98. Our long-term price projections have tempered somewhat, especially considering that Australian crop prospects have improved. If the fundamental picture does not start to improve, we may begin revising our long-term price objectives downward for the December contract as well as the deferreds. The second quarter of the marketing year is seasonally a strong quarter, typically driven by demand. But this year, second-quarter demand has been slack, and major export competitors to U.S. wheat have increased their production prospects. However, we will remain closely attuned to Australian rainfall reports through October, as well as U.S. winter wheat prospects and export demand.
El Nino remains a swing factor from a long-term viewpoint.
Tom Levis
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