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(September 29, 1997) WHEAT: For wheat, the September Stocks report will help the market quantify first-quarter wheat feedings and give the first glimpse of domestic demand. Similar to corn, only wheat exports are measured weekly via export inspections and export shipments, and compiled monthly in the Census report. We are projecting September 1 wheat stocks at 2,114 million bushels, exactly the average trade guess within a range of 1,980 million to 2,194 million bushels. The USDA estimated stocks at 444 million bushels in June and 1,724 million in September 1996.
The USDA does not have an objective measure of feed/residual demand, thus the estimate is derived from the other balance sheet components. To arrive at the feed/residual demand figure, the USDA subtracts supply (beginning stocks, production and imports) from the Stocks in All Positions survey results on September 1 to define disappearance. Then, from that disappearance figure, it subtracts exports (which are tracked weekly via other reports) and estimates of food/seed/industrial use; the remainder is unexplained variance labeled as feed/residual demand. The first quarter's estimate almost always contains the largest feed/residual demand figure for the year simply because the error associated with projecting production Is highest in that time period. This is partly due to wheat still standing in the fields at the time of the survey. Additionally, the stocks survey does not cover grain in transit, and shipments usually peak in the marketing year's first quarter.
We use a regression equation as a proxy for determining feed/residual demand. The equation uses previous USDA demand estimates against actual quarterly demand to derive a feed/residual component. Our estimate for feed/residual demand for the first quarter is 282 million bushels, 5% below the five-year average of 296 million. It is encouraging that our proxy-produced projections for the upcoming second, third and fourth quarters that are consistent with what USDA typically calculates–negative feed/residual figures for the second and fourth quarters and a positive number for the third quarter.
As we explained in the corn market commentary, coming to an export figure is mostly academic. Although the August Census figures have yet to be released, we have a fairly accurate picture through the weekly Export Inspections reports. Our projections peg export demand for the first quarter at 282 million bushels, or 5% less than the five- year average of first-quarter exports. This decline should not be too surprising because of the constant complaint since harvest that export demand is weak. However, over that same five-year period, average annual exports were 1,202 million bushels, or 9.3% more than USDA's current 1997/98 projection of 1,100 billion bushels. Thus, even though the current export pace lags last year as well as the five-year average in nominal terms, it actually is ahead of the five-year average as a percent of total projected annual exports. Still, no matter how you slice it, this year's exports are lower than last year's, which totaled 10% less than the USDA's current projection for the new season.
The market is anticipating (and hoping for) new business that is not already priced into the balance sheet. However, the promise of unanticipated business appearing on the United State's doorstep looks less likely than it did a month ago. Australian wheat production prospects are improving with each raindrop that falls and EU wheat quality is becoming less of a concern as well. These improvements are slightly offset by expected shortfalls in Argentina's wheat crop.
So far, the usual suspects are on the wheat export books and continue to purchase forward. Egypt typically is the single largest importer of U.S. wheat and is holding true to form this year. According to export commitments as of September 18, Egypt has committed to 2.568 million tonnes, followed by Japan at 1.399 million. Pakistan at 1.086 million and Philippines at 0.878 million. These four countries represent 62% of total U.S. wheat commitments to date of 9.494 million. (Another 72 countries import enough U.S. wheat that the USDA tracks their purchases.)
We project first-quarter food/seed/industrial demand at 228 million bushels, almost 4% above the five-year average of 220 million bushels. Our projection is derived front a simple regression that was defined from the trend of the previous 10 years of data. The growth rate of food/seed/industrial demand is fairly stable (or at least the most stable of the three demand components) and has a positive growth trend just above the population growth rate.
We project the September 1 wheat Stocks report will reveal first-quarter disappearance of 858 million bushels and stocks of 2,114 million bushels, 7% larger than the five-year average and 23% larger than the year-ago figure. Stocks are obviously more ample this year than last and annual carryout is expected to grow by 227 million bushels, thus pumping up the stocks-to-use ratio from 19.2% last year to a very comfortable 28.2% in 1997/98.
The September 1 Stocks report should help keep pressure on the wheat market for the short term. In turn, this weakness should provide an opportunity to establish longs in the wheat market for the fall or winter time period, in anticipation of an improved demand picture. If potential export demand falters from our original projections, we may have to lower our upside price objectives from $4.25 per bushel to the late-August high of $3.98, basis December.
Tom Levis
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