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PRUDENTIAL SECURITIES, INC.
One New York Plaza, New York, New York
(October 13, 1997) WHEAT: After following corn prices higher, the wheat market exhibited some measure of independence mid-week and started to trade its own negative fundamentals once again. We were not expecting much excitement on wheat's Supply/Demand report and that was exactly what USDA served. The most significant change was the increase in world wheat production and ending stocks, which cast a bearish light to the market. Despite these changes, wheat still managed to close 7 cents per bushel higher for the week thanks to fund buying in corn, which lifted wheat in sympathy.
The U.S. 1996/97 Supply/Demand report disclosed a few minor bookkeeping adjustments, which is not out of the ordinary. Unlike the new-crop corn balance sheet, the 1997/98 wheat Supply/Demand report had little to add beyond both the stocks and small grains reports of late September. The USDA projected total supplies at 3,065 million bushels and raised feed/residual demand by 50 million bushels to 325 million, figures that were not surprising. However, the export figure was sliced 25 million bushels to 1,075 million largely due to improved export prospects in Australia and Canada. Overall, the U.S. wheat supply/demand balance tightened slightly to 665 million bushels from 671 million, causing a decline in the stocks-to-use ratio to 28.0% from 28.3%, a minor change at best.
The U.S. 1996/97 Supply/Demand report disclosed a few minor bookkeeping adjustments, which is not out of the ordinary. Unlike the new-crop corn balance sheet, the 1997/98 wheat Supply/Demand report had little to add beyond both the stocks and small grains reports of late September. The USDA projected total supplies at 3,065 million bushels and raised feed/residual demand by 50 million bushels to 325 million, figures that were not surprising. However, the export figure was sliced 25 million bushels to 1,075 million largely due to improved export prospects in Australia and Canada. Overall, the U.S. wheat supply/demand balance tightened slightly to 665 million bushels from 671 million, causing a decline in the stocks-to-use ratio to 28.0% from 28.3%, a minor change at best.
The world picture painted by the USDA was rather bearish as the department increased production 4.5 million tonnes to 600.64 million. Demand was unchanged at 581.58 million tonnes, allowing ending stocks to increase to 127.4 million from 122.4 million; the world stocks/use ratio increased to 21.9% from 21.0%. The world has ample wheat stocks, and is in a very comfortable position compared to the last few years.
The Australian wheat production estimate increased 1.0 million tonnes to 17.0 million, which in turn spurred the USDA to add another 500,000 tonnes in exports, bringing 1997/98 Australian exports to 12.05 million tonnes. Canadian production increased 500,000 tonnes to 23.5 million, and the USDA pushed the extra wheat right out the door, raising 1997/98 Canadian export demand a similar amount to 18.0 million. The USDA downwardly revised EU wheat production by 1.3 million tonnes to 95.75 million, but left exports unchanged, apparently expecting the EU to aggressively subsidize wheat this season. Major importing nations are expected to buy just 400,000 tonnes less than they did a year ago while holding demand relatively steady, apparently preferring to eat into ending stocks. Similar to the corn situation, the United States faces strong competition from Canada, Australia and the EU through subsidies, while the importing nations are probably a little more comfortable than previously thought.
Despite the slight downward adjustment in U.S. ending stocks, the overall picture for wheat is more negative than we had previously thought. World production of wheat is rising in competing exporting nations, and importing nations may not be as hungry for wheat.
PRICE OUTLOOK–SHORT TERM–In general, the 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 support at $3.60, $3.50 and $3.47. Because of the lack of friendly fundamentals, we are not in a hurry to buy futures. Eventually we want to get long for the late fall/winter time period, but not in the current environment. Before we probe the buy side, we need to see supportive fundamentals begin to develop, such as export news, adverse weather hindering planting, or evidence that El Nino is going to have a larger-than-expected negative effect upon Australian wheat production.
LONG TERM–We have lowered our upside projections because of the beneficial rains that fell in Australia, which the USDA confirmed last Friday with its higher production estimate, as well as the general bearish tone to the world Supply/Demand report. Our fundamental rationale for a normal seasonal rally is unchanged from previous reports, but tempered somewhat due to the expectations that the El Nino may not harm the Australian wheat crop as much as expected. However, we will remain closely attuned to Australian rainfall reports through October, a critical month as the wheat moves through the late-jointing to heading stage; more precipitation is needed during this time period. Additionally, Chinese winter wheat areas need more moisture for the crop to develop prior to dormancy. We project December wheat will test the late-August high of $3.98.
Tom Levis
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