wmeubank@ocp.kcmo.com
PRUDENTIAL SECURITIES, INC.
One New York Plaza, New York, New York
(October 6, 1997) WHEAT: Over the last several weeks, the wheat market has been heading nowhere but south. December wheat lost 50 cents per bushel since peaking in late August at $3.98. Since then, the market has focused sharply on the lack of strong U.S. wheat exports, favorable weather for winter wheat planting and indications that the El Nino may not cut Australian wheat production as much as initially expected. The recent bounce from lower support levels has caused some market participants to proclaim that wheat prices are in a value area and that the break is over.
We agree that prices are either in or near a long-term value area. However, given the following negative fundamentals, there probably is not a strong reason to buy wheat just yet. We would rather wait to see new supportive fundamental input or a technical situation that finds support at contract lows.
Weather conditions for winter wheat planting continue to look very favorable. The forecast calls for normal to below-normal precipitation in the winter wheat belt with normal to above-normal temperatures. This weather forecast should aid planting. The emerging crop could use more moisture, but recent rains in Oklahoma, Texas and South Dakota have taken the edge off of concerns. Longer term, more moisture is definitely needed for the emerging crop to establish decent stands prior to dormancy. In addition, some individuals have voiced concerns over top soil moisture levels, but top soils are not nearly as dry as they were in the Corn Belt this year, and ample time remains to remedy dryness.
Weather conditions for the balance of Canadian spring wheat harvest currently look favorable. Canadian wheat harvest is virtually complete, with Manitoba and Saskatchewan done and Alberta 90% complete. The latest weather forecast calls for normal precipitation and normal to above-normal temperatures, i.e., ideal harvest weather.
Export demand for U.S. wheat remains a sore spot for the bulls. This is the time of the year when the United States has the world export market virtually to itself, and yet export demand remains dismal. With Australian wheat production prospects increasing and the Canadian harvest virtually done, the United States will soon face more competition. Finally, the European Union, which so far has opted to not be aggressive in the export markets, is likely to change that stance, thus further cutting into U.S. export potential.
Australian wheat production prospects have definitely improved. September rains across the bulk of the wheat- producing area (except southern Queensland and northern New South Wales) were extremely beneficial. The perception is that Australia needs 1-2 inches more rain during October in order to successfully progress through the late jointing and heading stages. Normal precipitation for October is: 1.25 to 2.5 inches in New South Wales; 2-3 inches in Queensland; and 1-2 inches in Victoria. Going into last weekend, the weather forecast was cooperating, and suggested 0.3-1.0 inches would fall over Sunday and Monday, levels that would provide a good start for the crop's monthly needs. This could be a year when El Nino does not have a strong negative impact on Australian wheat production.
SWING FACTORS–ARGENTINE WHEAT PRODUCTION–Wheat continues to suffer from ongoing problems in Argentina. The winter wheat that went into the ground last May and June under dry conditions later suffered from early season freezes. Consequently, the crop is a little behind normal and is not quite in the flowering stage, which leaves it less vulnerable to near-term freezes, such as those forecast for the upcoming week. There was some rain in September. but more is needed as the crop approaches the critical flowering stage. The forecast called for 0.25-1.0 inches over the weekend of October 4-5, and then dry and cool for the foreseeable future. Normal October rainfall levels include: 3.27 inches in Cordoba; 3.9 inches in Santa Fe: and in Buenos Aires, 3.94 inches in northern parts and 2.56 inches in the southern areas. Even if the rains are timely and adequate, it will be hard for the crop to recover from this fall's dry weather.
CHINA'S WINTER WHEAT CROP–The recent dry weather that is likely to have negatively affected this year's corn crop in China probably has had a similar effect on the winter wheat crop as well. Winter wheat is grown principally in the North China Plain, a major corn-producing region. This area has had one decent rain in early September, but not much since. The winters tend to be dry, thus the winter wheat crop relies heavily upon irrigation. Unfortunately, given last summer's drought, much of the upper Yellow River valley, where irrigation waters originate, have not had an opportunity to replenish their reservoirs, and water supplies may fall short of irrigation needs.
EU EXPORTS–When, not if, the European Union begins aggressively exporting wheat into the world market is an unknown that will result in increased competition with the U.S. export program.
PRICE OUTLOOK–SHORT TERM–Wheat fundamentals remain negative, and we expect prices to have a tough time sustaining any rallies for the short term. Look for continued weakness in December wheat, with prices probably falling to test support at $3.50 and $3.47. With the lack of friendly fundamentals, we are not in a hurry to take a long position. Before we want to enter the game, we need to see a supportive fundamental picture start to develop, such as export news, adverse weather hindering planting, or evidence that El Nino is going to have its typical negative effect upon Australian wheat production.
LONG TERM–Currently, we project that December wheat will test the recent high of $3.98. The fundamental rationale is unchanged from our previous reports--the normal seasonal rally–the fall/winter time period as well as the potential for El Nino to wreak havoc on Australian wheat production should lift prices. Although recent rainfall has been beneficial to Australian wheat, October is a critical month as wheat moves through the late- jointing to heading stage; more precipitation is needed during this time period. If weather turns sour for Australian wheat over the next 30 days, then we will re-evaluate our upside objectives.
Tom Levis
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