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(August 18, 1997) WHEAT: A week-to-week decline in wheat futures prices belies the fireworks on Tuesday, the day of the USDA's August Crop report. Despite a bearish wheat production figure, the limit-up rally in corn pulled December wheat prices to $3.88 per bushel, challenging the high made on June 12. The USDA's production estimate of 2,531 million bushels was up 100 million from the previous report, making it the second-largest crop since 1985, eclipsed only in 1990/91 when production reached 2,730 million bushels. The USDA's estimate was above the high end of the trade range, which spanned from 2,427 million bushels to 2,517 million.
The USDA dropped its import figure 5 million bushels to 95 million, which is not too surprising (or significant) given the crop's size. Domestic demand was left unchanged at 1,275 million, but export demand increased 50 million bushels to 1,100 million, reflecting better prospects for U.S. wheat exports due to production concerns in some major wheat exporting nations. The net result of the forecast changes raised the carryout by 45 million bushels to 695 million; this figure is 57% higher than the comparable year-ago level. The stocks-to-use ratio is projected at 29% versus 28% in July, and is a full 10 percentage points above the 1996/97 estimate of 19.3%.
Statistics on the world wheat balance sheet were not necessarily bearish. Although the world wheat production estimate increased by 9.5 million tonnes, the countries where most of the rise occurred were those that had little to do with world export patterns. Wheat production estimates in China and the FSU-12 were raised 7 million tonnes and 5 million, respectively, versus the previous report. Together, they are expected to produce 33% of world wheat yet garnish less than 5% of total world wheat trade. World ending stocks are projected to rise 4.5 million tonnes 121.4 million, which leaves a rather comfortable stocks-to-use ratio of 21.4%; this figure is marginally larger than the July estimate of 20.8%.
Chinese wheat production of 121 million tonnes beats the previous record of 110 million set last year. It is interesting to look at the trend in Chinese wheat yields. Over the last 13 years, yields decreased from the previous year just five times and never more than 3%; in the United States, yields declined nine out of 13 years. Since 1983, Chinese wheat yields have climbed 69%. U.S. wheat yields would have to equal 66.6 bushels per acre, instead of the paltry (but potentially record) 39.9 bushels currently projected, in order to match the Chinese yield growth rate. Interestingly, the record U.S. yield was 39.4 bushels per acre, which occurred in 1983, the baseline year for China's 69% growth rate.
Major wheat exporting nations (other than the United States) are expected to face reduced yields as a result of adverse weather. Australian wheat production prospects were cut by 2.5 million tonnes to 16 million in the latest report. The USDA also dropped Canadian production by 2.0 million tonnes to 23.0 million; Argentine production was scaled back to 12.7 million tonnes from 13.5 million. The net result is that production dropped 5.3 million tonnes for these three U.S. wheat export competitors, with their ending stocks falling 3.05 million tonnes and their exports declining 2.3 million. The United States is expected to pick up 1.4 million tonnes of exports from the expected 2.3- million-tonne decline. The other 1.0 million tonnes of “missing exports” was due to a similar-sized decline in Chinese imports that is a result of its record crop.
The EU-15 remains the largest competitor for the United States in world wheat trade. Although the EU-15 production estimate was flat at 98.55 million tonnes, it is expected that it will have a slightly larger export program than the United States at 30.7 million tonnes. The EU-15 may become aggressive in the world export market after October through the use of export subsidies. In turn, this could eat into some of the U.S. export demand. However, the jury is out regarding EU crop quality. Adverse weather could generate more feed wheat than anticipated, leaving the United States as the sole provider of large volumes of quality milling wheat.
Further declines in Australian wheat production could both tighten the world balance sheet and increase U.S. export potential. Recent information suggests that the 16.0-million-tonne projection that the USDA currently holds for Australia production should capture most of the shortfall. However, the very strong correlation between Australian wheat shortfalls and El Ninos suggests that another 1.5- 2.0 million tonnes of production could be at risk. In turn, Australia's export program likely would decline by another 1.0 million tonnes to 11.0 million.
Tom Levis
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