–The market awaits export demand.

–U.S. export forecast reduced slightly due to increased competition from Canada and Australia.

–Record world wheat production expected.

–U.S. winter wheat planting speeds along.

–Slight adjustments to U.S. wheat supply and use balance.

–White wheat outlook: smaller use, higher stocks.

With the 1997 U.S. wheat crop 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 drooped during the bumper U.S. winter wheat harvest. But for most of September and into October, wheat prices worked mostly lower as unexpected rain drenched key growing regions in Australia, boosting production prospects from early- season expectations. U.S. exports are still expected to rise from a year ago due to reduced foreign competitor production, but the fight for market share is expected to intensify somewhat. Wheat futures prices rallied during the first full week of October, mostly on the strength of higher corn and soybean prices.

As usual, U.S. wheat prices for the rest of the marketing year will hinge mostly on export demand and prospects for the next year's crop. Unlike last year, March wheat futures are above December futures, which provides an incentive to hold stocks. This "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. However, the carry has declined in recent weeks as Australian crop prospects have improved.

U.S. exports are forecast down 25 million bushels from the September forecast to 1,075 million bushels in 1997/98 (June-May marketing year). This is down 0.5 million tons on the July/June international marketing year to 29.0 million tons. Increased export competition is expected from Australia and Canada because of increased production. USDA's forecast for Australia's crop increased to 17 million tons after above normal rains fell during the critical month of September, even though the El Nino was thought to make abundant September rains less likely. However, earlier dryness and lower planted area will keep Australia's wheat production down about 25 percent below last year's record. In Canada, favorable harvest conditions boosted production prospects to 23.5 million tons, up 0.5 million from last month.

Although the weekly export pace since June has advanced relative to a year earlier, U.S. exports are 10 percent behind last year's level as of October 2, according to U.S. Export Sales. But outstanding sales are up, so commitments (exports plus outstanding sales) are down only about 3 percent. While early season exports were strong in 1996/97, the pace of exports dropped dramatically as the season progressed because of tight U.S. supplies and large production in Canada, Australia, and Argentina. This year, U.S. supplies are up, and production by major foreign competitors is down, so U.S. exports are expected to be more stable through the year.

This month's decline in forecast U.S. exports is small because expected exports for Argentina also declined. The pace of sales and shipments to date indicate that Argentina is consuming more than expected domestically, and exporting less in 1997/98 (July/June).

European Union (EU) production in 1997/98 was reduced 1.3 million tons from September, mostly because of the effects of excessive rain in England, especially late in the growing season. EU exports in 1997/98 are forecast unchanged from last month, but down from a year ago. The EU Commission has been licencing subsidized wheat into export channels at only a modest rate.

World wheat production is forecast at a record 601 million tons, up 4.5 million from last month. Forecast foreign wheat production rose this month, with increases in Australia and Canada more than offsetting the drops in EU and Kazakstan. However, the year-to-year decline in major foreign competitor production is still large, with production in the EU, Canada, Australia and Argentina down more than 20 million tons from a year ago. This underpins the projected year-over-year increase in U.S. exports and supports price prospects.

The largest production increases were in Russia (up 3.0 million tons from last month's forecast), and in India (up 1.7 million). India is expected to hold the additional production in stocks. In Russia, forecast imports are revised down and exports up. However, this was somewhat offset by reduced exports from Kazakstan, where expected production declined 1.0 million tons.

More than offsetting the decline in Russian wheat imports is increased imports forecast this month for Pakistan, Iran, and South Korea. Iran and South Korea are expected to increase wheat feeding. Purchases by Pakistan from Australia have been larger than expected, and given the available credit, imports are expected to reach 3.5 million tons in 1997/98, up 0.5 million from last month.

Fall planting prospects for U.S. winter wheat remain generally favorable in most growing areas. Planting was slowed by rainfall in the central and southern Plains in late September. But it sped up as dry, very warm weather (weekly temperatures 6 to 12 degrees F above normal) blew across the Plains in early October. This promoted winter wheat planting and growth, but reduced topsoil moisture. Rain showers have since returned, benefiting many hard red winter wheat-growing regions.

As of October 5, the 1998 winter wheat crop was 58 percent planted, compared with 51 percent last year and 2 points ahead of the 1992-96 average. Producers in Montana have made excellent planting progress after showers replenished dry soils in September. Seeding continued at a blistering pace in Washington, though some reseeding was underway after rainfall caused crusting problems. Emergence of the newly planted winter wheat crop was 32 percent, ahead last year's 27 percent and 1 point above the 1992-96 average. Emergence is significantly ahead of normal in Colorado, Montana, and Washington.

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. The first forecast of winter wheat seedings will be released on January 10, 1998.

On the same day, USDA's estimate of December 1 wheat stocks will be released in the Grain Stocks report. The report will provide the first indication of second-quarter (September-November) use. Final production estimates for 1997 (in contrast to the preliminary estimates released on September 30) will also be released for all wheat classes in USDA's Crop Production-Annual.

USDA estimates the 1997 U.S. crop at 2.53 billion bushels, up 11 percent from last year and the fifth largest on record. Despite a freeze that threatened crops in the southern and central Plains last spring, 14 wheat-growing states either set or tied production records in 1997, with output in Kansas topping 500 million bushels for the first time. The U.S. average yield for all wheat hit a record high 39.7 bushels per acre. Compared with the September 1 forecast, total production is revised up 19 million bushels. Small increases in all winter wheat classes more than offset minor declines in spring wheats.

Total use is revised up 25 million bushels to 2,400 million, with feed and residual up 50 million and exports down 25 million. Feed and residual is now forecast at 325 million bushels, reflecting higher-than-expected “residual” likely associated with a such a large crop. (The preliminary forecast for the first-quarter feed and residual use is around 400 million bushels.) Total domestic food use is unchanged from September, leaving ending stocks at 665 million bushels, down 6 million from August.

Based on this month's decline in expected ending stocks and relatively strong grower prices during June-September, the forecast season-average farm price was raised from $3.20-$3.70 per bushel in September to $3.30- $3.70. This is down from $4.30 in 1996/97. Stocks are still up sharply from 444 million in 1996/97 and are the largest in 7 years.

Prices for HRW and SRW drifted lower on lack of export news during most of September. But for white wheat, prices fizzled all at once in late September when Pakistan announced a major purchase (400,000 tons) of white wheat from Australia, effectively beating U.S. bids at the tender. In early October, price quotes for U.S. No. 1 soft white wheat in Portland were about $3.88 per bushel, down about 20 cents from a week earlier. Cash prices for soft white wheat in Portland had held fairly steady throughout much of September.

The decline narrowed the price gap between white wheat and SRW after it had widened considerably during much of September. If the Australian crop is larger than expected and white wheat prices come under additional pressure, the gap could narrow further, making white wheat more competitive in some soft red markets.

Pakistan is the leading buyer of U.S. white wheat, accounting for nearly one-third of U.S. white wheat exports in 1996/97 (June-May). Most U.S. wheat sales to Pakistan are under the Export Credit Guarantee Program (i.e., GSM- 102). The program guarantees repayment of credit for up to 3 years extended to eligible banks that issue letters of credit on behalf of purchasers of U.S. products. In fiscal 1997 (October-September), virtually all of the $350 million of credit guarantees allocated for Pakistan were used for wheat. U.S. wheat exports to Pakistan totaled $375 million in fiscal 1996 and were $267 million from October 1996 to July 1997. Pakistan's export credit allocation is $250 million for fiscal 1998. (A number of commodities other than wheat are eligible.)

Trade developments are especially critical to the white wheat market because exports account for about two- thirds or more of total white wheat use. U.S. white wheat exports are forecast down 6 percent from the September forecast due to increased competition from Australia.

Lower domestic use is also contributing to softer prices this year. A year ago, soft white wheat worked its way into more domestic soft wheat milling blends when good-quality SRW wheat was hard to find. Total use is down a projected 8 percent from last year, with ending stocks expected to be the highest in 4 years.

Total white wheat supplies are down 5 percent in 1997/98, which will prevent even higher stock building. Production and projected imports are down, while higher beginning stocks are partially offsetting. Producers planted fewer acres due to planting problems in the Pacific Northwest and Michigan. Last fall, heavy rains in the Pacific Northwest slowed planting, while late field crop harvests in Michigan limited winter seedings. While white winter yields were down slightly from last year's high levels in the top producing states of Washington, Oregon, and Idaho, higher yields elsewhere (including spring wheat in Idaho and Washington) lifted the overall white yield to 69.9 bushels per acre in 1997. (This compares with the overall U.S. wheat yield of 39.7 bushels.) In particular, Michigan yields rebounded sharply from a disastrous 1996.

Compared with the Great Plains, soils in the Pacific Northwest are deeper, rainfall is more plentiful, and summers are cooler, which all contribute to a generally favorable environment for wheat production. And unlike the other classes of wheat, white wheat has posted steady yield increases. Since 1970, white wheat yields have grown more than twice as fast as the U.S. average for all wheat.

October 14, 1997Economic Research Service

USDA, Washington, D.C.

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