The wheat market is in the process of rebuilding stocks from the level set two years ago, the lowest in nearly 20 years. Thus, the wheat balance sheet has moved from tight supplies and relatively high prices toward a more comfortable supply situation and projected lower prices. However, even though ending stocks for 1997/98 are projected to increase for the second consecutive year, raising the stocks/use ratio to 22.3%, prices could be susceptible to a sharp rally if world production declines more than anticipated or if world consumption exceeds our expectations.

After reaching its lowest level of ending stocks in more than two decades and relatively high prices last season, the world wheat situation has reversed course. The 1996/97 season began with just 104 million tonnes of stocks, 14 million fewer than the previous year. However, production is thought to have rebounded 44 million tonnes to 581 million (second only to the 588 million in 1990/91) while the projected record consumption of 573 million tonnes is just 18 million tonnes above last year's level. Thus, ending stocks in 1996/97 are forecast to rise 8 million tonnes to 112 million, resulting in a rather comfortable stocks-to-use ratio of 19.6%.

The production prospects for 1997/98 are not expected to repeat last year's near-record performance. Indeed, harvested acreage is projected to fall 2 million hectares below 1996/97 levels to 228 million hectares, and well below the record set in 1981/82 of 239 million. The acreage reduction alone accounts for about one-third (5 million tonnes) of the projected 16.5-million-tonne drop in world wheat production. The declines in harvested area in Argentina, Australia, Canada and the United States, and to a lesser extent, the EU-15, will more than offset the expected increases in China. However, because yields in China and the EU-15 are much higher than the rest of the major wheat producing nations, the reduction in 1997/98 world wheat production will be tempered.

The likelihood of lower yields in many major growing areas is why we expect a production decline in the upcoming season. As Figure 2 shows, world yields have been flattening over the last decade to 2.5 tonnes per hectare (37.2 bushels per acre). Last year, world yields topped at 2.52 tonnes per hectare, with record or near-record levels set in Argentina, Australia, EU-15, Canada and China. It is unlikely that these record levels will be repeated across the major wheat producing nations. We project 1997/98 world wheat yields slightly lower at 2.48 tonnes per hectare, which would result in a production drop of 13.0 million tonnes from last year's level. Even though five out of the six largest wheat producing nations have positive yield curves, the United States trend is flat to negative, thus keeping a lid on the average yield rate. We expect 1997/98 world wheat production to fall short of both last year's 588 million tonnes and the trend forecast of 570 million, totaling just 568 million tonnes.

World consumption, which has been climbing at a slower pace than in the 1980s, is not expected to make a second consecutive new record in 1997/98. Projected 1997/98 consumption should be similar to the consumption levels in 1995/96 and 1994/95; i.e., about 550-555 million tonnes. Additionally, world wheat trade is expected to decline (barring any weather calamities) because non-wheat exporting nations hold more wheat than the major wheat exporting nations. Also, because China is committed to showing the world it can be self-sufficient, its tends to import only enough wheat to finish the year with 23-25 million tonnes of ending stocks, which is approximately a 20% stocks-to-use ratio. China often accounts for more than 10% of world wheat imports. However, we expect China to import just 4 million tonnes this year, or about 2.5% of total world imports. In the Former Soviet Union (FSU) regions, three consecutive years of low wheat yields should mean that in 1997/98, a greater proportion of wheat will be grown for food consumption rather than feed. This means that the same nutritional value can be achieved with fewer bushels of wheat by consuming it directly instead of through meat products. We project world wheat consumption will fall 17 million tonnes versus last season to 556 million tonnes.

The net result of our world supply and consumption estimates is that world ending stocks will increase for the second consecutive year, rising 12 million tonnes in 1997/98 to 124 million; the stocks-to-use ratio of 22.3% would mirror the ratio of 1994/95. However, world wheat stocks are trending lower, and there is currently little room in the balance sheet to absorb any production shortfalls in 1997.

Like the world wheat situation, the U.S. wheat balance sheet is becoming less tight in 1996/97 due to increased production and decreased demand. Projected carryout should rise 26% from 1995/96. New-crop prospects appear favorable. Old-crop prices probably will remain in a trading range through the end of May. New-crop prices will keep pace with old-crop contracts until the market is convinced that there will be adequate production, at which point, prices could head south.

The 1996/97 wheat balance sheet is expected to change little between now and the end of the crop year on May 31. Indeed, the only change that might occur is an increase in exports to 960-965 million bushels, up from the current estimate of 950 million. The current pace of U.S. wheat exports exceeds what is needed to achieve the USDA export estimate of 950 million bushels. Over the last four weeks, exports have averaged 191 million bushels, which if continued, would push the export figure to 967 million bushels for the year. This export increase would cause a similar-sized decrease in ending stocks, thus dropping the stocks-to-use ratio to 20.1% from 21%.

Although the all-wheat figures look fairly static, there is intrigue in how the different classes of wheat would be affected by this continued heavy export pace. Based on recent exports, it appears durum probably would exceed the USDA export projection by as much as hard red winter (HRW) would miss it--by about 1.0 million bushels--leaving their stocks-to-use ratios mostly steady at 28.3% and 18.6%, respectively. White wheat exports would increase by 9.3 million bushels, thus dropping its already tight stocks-to-use ratio to 13.2% from 14.5%. Hard red spring (HRS) exports would increase almost 21 million bushels to 296 million, thus decreasing the stocks-to-use ratio by 4.3 percentage points to 28.5%. Because recent export demand seems to be for any wheat except soft red winter (SRW), those exports would fall by almost 8 million bushels to 132 million bushels and increase the stocks-to-use ratio to 13.9% from 11.8%. It is unlikely that the USDA will reflect a further 5- to 10-million-bushel decrease in SRW exports until there is more certainty that the export pace will not slow.

Given the logistical problems that Canada has been having out of the Pacific Northwest and current, unfavorable weather forecasts, expect the United States to be the main benefactor and pick up export business that would have been slated for Canada. Additionally, Australia's record wheat crop of 23.1 million tonnes appears to be a mixed blessing. Although Australia continues to set export-loading records each month, it cannot keep up with sales. As a result, the country is not booking positions for any sooner than April-May. With these two formidable competitors at least temporarily sidelined, the United States has been taking advantage of the situation and increasing export sales. The only remaining thorn is the EU-15 and its restitution program. Recently, the EU-15 has been very aggressive in terms of tonnage and refunds, undercutting U.S. prices and picking up business that normally would have come to the United States. One prime example is French wheat business that was done at as much as $8-$10 per tonne less than the U.S. price, a situation that never would have been possible without the hefty EU-15 subsidy.

Overall, U.S. wheat exports look very favorable, with the strong likelihood of exceeding the USDA 1996/97 projection of 950 million bushels by 10-15 million. Still, these increased exports will not change the balance sheet significantly. Also, do not expect this single factor to have much influence on flat prices, rather, it will affect the spreads between the different wheat classes. The export factor we have outlined would definitely favor both Minneapolis and Kansas City wheat over Chicago.

Another feature to the old-crop wheat picture is the tight deliverable stocks situation in Minneapolis, currently at about 22% of year-ago levels. Because deliverable stocks total just 3.3 million bushels, with little prospects of replenishment until fall, Minneapolis prices are relatively strong compared to Chicago. There, deliverable wheat stocks are 5.5 million bushels, representing 42% of the levels seen at this time last year. The tight deliverable situation in Minneapolis is expected to continue through at least the May and July contracts, and possibly September because the soft red spring crop is harvested later than hard red (Kansas City) and soft red (Chicago).

The U.S. winter wheat crop is in very favorable condition. The crops were planted last fall in a timely fashion and under ideal conditions, and established decent stand before entering dormancy. The USDA estimates winter wheat acreage at 48.3 million acres, so the big question looming on the horizon is the size of the spring wheat crops. The March 31 Planting Intentions report will give us a good indication of these acreage prospects. No matter the acreage, delayed plantings in the spring wheat belt may prove to be a concern. The northern plains states have a lot of snow on the ground covering already saturated soil, and this situation probably will keep farmers out of their fields after the snow melts. This weather feature would support Minneapolis prices versus Chicago. We project total 1997/98 wheat plantings at 72.0 million, down from 75.4 million last year.

Winter wheat weathered the winter season very well, and SRW is now breaking dormancy. The Kansas HRW crop looks particularly favorable, with the 17% of the crop rated in excellent condition, 62% good, 18% fair and only 3% poor. If conditions remain favorable, there will be pressure on the July contract in Kansas City.

Similarly, the SRW crop should have excellent prospects of producing a decent crop in 1997/98. However, it remains to be seen how recent flooding in the Ohio River valley will affect the SRW crop in that region. University of Illinois agronomists have said that damage will be minimal, although probably more than the usual flood damage that occurs in that region every year, even though the flooding is more extensive than normal. Price rallies based upon floods damaging the SRW crop are probably less of a threat to short positions than continued fund buying in the Chicago contract.

Overall, the winter wheat crops look well on their way to producing solid yields above trend (albeit a flat trend at around 37.2 bushels per acre). If the spring crop gets planted in a timely fashion, then U.S. 1997/98 wheat production could total 2,403 million bushels on 72 million planted acres.

The net result would be for U.S. wheat supplies to rebound to levels typically seen prior to 1995/96. With expected usage of 2,418 million, ending stocks for 1997/98 would grow to 531 million bushels from 476 million last year. This increase would cause the stocks-to-use ratio to rise two percentage points to 21.9%; a comfortable level as long as the rest of the world produces solid crops. However, if the world wheat yield dropped just 3.5% (or the equivalent of 20 million tonnes), then importing nations could turn to the United States for wheat supplies. This would cause the comfortable stocks/use ratio of 20%-22% at present to drop sharply to the lower teens.

Old-crop wheat prices will most likely remain trapped in a 35-cent-per-bushel range between the contract lows of $3.45 and $3.80, basis the Chicago May contract. Without any new catalyst (such as continued expansion of flooded areas), fund buying is the only likely candidate to move old-crop Chicago wheat above this range. Prospects for Minneapolis and Kansas City prices are much better due to good export demand and tight deliverable stocks. Kansas City May appears to have broken out the top of the trade range defined last October, and is consolidating around the pivotal $4.00 point. This contract could reach as high as $4.30, but we would be surprised to see it go beyond that level. In Minneapolis wheat, the May contract should reach $4.20 initially, and potentially $4.40, depending on the export pace through the remainder of the crop year.

New-crop Chicago July probably will exceed our earlier estimates of $3.75-$3.80 and potentially test the $3.95 level. We believe that price represents a good sale, with prospects for prices falling below $3.30 as normal weather should increase production and ending stocks. Minneapolis new-crop July could be an exciting contract, indeed. With precipitation accumulations exceeding 125% of normal since November in the Central Plains, it seems that hard spring wheat plantings will be delayed and push this market higher. Additionally, this is a tight year, and July will act as if it were part of the old crop, lending further strength to that month.

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