WHEAT OUTLOOK December 13, 1995 Approved by the World Agricultural Outlook Board ----------------------------------------------------------------------------- WHEAT OUTLOOK is published monthly (except January) by the Economic Research Service, U.S. Department of Agriculture, Washington, DC 20005-4788. WHS-1295. ----------------------------------------------------------------------------- Recent Developments HIGHLIGHTS -- U.S. 1995/96 import forecast reduced, lowering ending stocks. -- U.S. food use forecast revised down slightly. -- World wheat trade increases despite imposition of EU export tax. -- Model updated for using futures prices to forecast farm prices. U.S. IMPORT FORECAST AND FOOD USE REDUCED The pace of U.S. wheat imports from Canada was expected to slow during August and September because high tariff rate quotas were close to being triggered (see table 6). However, according to preliminary U.S. and Canadian data, imports remained slow during October and November. With limited supplies of good quality wheat, and strong off-shore demand, Canada appears to be pursuing other markets more aggressively than the United States. The U.S. import forecast was reduced from 100 million bushels to 85 million, including the wheat equivalent of flour and selected products. Most of the decline was in hard red spring wheat (HRS), with small reductions in durum and hard red winter (HRW). The 1995/96 forecast of U.S. food use was reduced slightly, from 865 million bushels to 860 million, because growth in food use from June through November has been slower than expected (see table 4). Reduced food use partly offset the lower import forecast, dropping ending stocks by 10 million bushels to 385 million. Because of the pace to-date, durum exports were reduced 5 million bushels while soft red winter (SRW) exports were increased 5 million. Thus the forecast of durum stocks increased slightly, while forecast HRW, HRS, and SRW stocks declined. WORLD WHEAT TRADE INCREASES DESPITE EU IMPOSING EXPORT TAX Projected 1995/96 world wheat production was reduced in December with the most significant changes occurring in Canada and Russia. Statistics Canada increased Canada's wheat production estimate to 25.4 million tons, a result of higher yields. Conversely, Russia's wheat production was lowered to 28 million tons due to the severe drought during much of the growing season. In Australia, harvest progress has been slowed by substantial rainfall, primarily in New South Wales. However, production is projected to remain at 17 million tons, although quality may diminish with the excessive precipitation. Also, heavy rainfall has held up wheat harvesting in parts of Argentina, whose crop was delayed by late seedings caused by a prolonged drought earlier this year. Nevertheless, with only a small portion of the wheat crop harvested, Argentina's wheat production estimate was unchanged from November. Global wheat trade projections rose for December with the expanded Canadian crop and a rise in projected imports by Russia from outside the FSU. But because the EU Commission imposed an export tax on soft wheat in early December, EU wheat exports were lowered by 1 million tons. The purpose of the export tax was to pressure high internal EU prices that have persisted for several months. The export tax on daily foreign sales amounts to 25 European Currency Units (ECU) per metric ton (MT) or $32 per ton, based on the current ECU-US$ exchange rate. Projected U.S. wheat exports were unchanged in December with four of the five major U.S. wheat classes outpacing sales and shipments of 1994/95, according to U.S. Export Sales (Hard Red Winter wheat is the only exception). The increases from last year in U.S. wheat exports are particularly evident in several South American and Southeast Asian destinations, including Brazil, Colombia, Chile, Peru, Indonesia, and the Philippines. The outlook for 1996/97 world wheat production is improved over 1995/96, as several Northern Hemisphere countries that suffered from drought in 1995/96 now have greater soil moisture for winter wheat plantings. Russia and Ukraine will have increased winter wheat acreage because of high prices and favorable planting conditions. Topsoil moisture also increased in Spain with abundant rainfall, in contrast to drought conditions of the previous 4 years. Most areas of China received near-to above-normal precipitation during October, providing beneficial planting conditions for winter wheat. **************************************************************************** * Information Contacts: * * Edward W. Allen (senior wheat analyst) (202) 219-0831 * * Mark Simone (international) (202) 219-0823 * * Linwood Hoffman (wheat price model) (202) 501-7103 * **************************************************************************** FORECASTING WHEAT PRODUCERS' SEASON-AVERAGE PRICE USING FUTURES PRICES There is heightened interest in forecasting producer prices for wheat during the 1995 crop year as the mid-point of USDA's WASDE forecast price range has risen from $3.45 in May 1995 to $4.35 in November. Futures prices are a composite indicator of expected supply and use and can be used to forecast short-run farm prices, despite questions about the impact of technical traders on futures prices. This forecasting procedure for wheat was first explained in the March 1992 (WS-296) issue of the Wheat Situation and Outlook Report. The following provides an update of the methodology and a forecast of the 1995/96 season-average price for wheat. Forecasting Method Forecasts are made of the monthly average cash wheat price received by farmers for each of the 12 months of the crop year, starting with June. Each month's forecast of the all wheat price is based on the current Kansas City Board of Trade's futures price for the nearest maturing contract (referred to as the "nearby futures contract"). The forecast for each month is obtained by adding a historical average-price-difference "basis" (cash price minus futures price) to the nearby futures price. Monthly price forecasts are then weighted by a historical percentage of sales by month to calculate the weighted season- average price forecast. Basis The difference between a cash price at a specific location and the price of a particular futures contract is known as the basis. The basis tends to be more stable or predictable than either the cash price or futures price. Several factors explain the basis and their magnitude varies from one location to another. Because the basis calculated for this analysis represents an average of U.S. conditions, it reflects a composite of these influencing factors. The basis in this study is the arithmetic difference between the monthly U.S. average cash price received by producers and the nearby futures settlement price. For example, the December basis is the difference between the December average cash price received by producers and the December average of the daily settlement price of the March futures contract. A 5-year moving average, or another appropriate average, of these bases is used to reduce distortions that may occur in any given month and is updated at the end of each crop year. Monthly Price Weights Monthly marketings are used to construct the weighted season-average price. Each month's weight represents the proportion of the year's crop marketed in that month. A 5-year moving average, or another appropriate average, of these monthly weights is constructed (1989/90 through 1993/94) and is updated annually after the December issue of USDA's Crop Production is released. The monthly prices, actual or forecast, are multiplied by each month's corresponding weight. Data Historical daily settlement prices are obtained from the Commodity Futures Trading Commission (crop years 1981-94) of each wheat (HRW) futures contract traded on the Kansas City Board of Trade. Current futures settlement prices are from the Wall Street Journal (crop year 1995). Cash prices are from USDA's Agricultural Prices. Weights for monthly marketings are from the December issue of USDA's Crop Production. Calculation of 1995/96 Forecast Table A illustrates the procedure used in forecasting the producers' season- average wheat price for the crop year 1995/96. This procedure produces a monthly forecast of the season-average price. A monthly futures settlement price (as observed on Thursday, December 7, 1995) is used for each of the nearby contracts. Alternatively, a daily or weekly forecast of the season- average price could be made. Six steps are involved in the forecast process. 1. The latest available futures settlement prices (item 1) are gathered for the contracts that are trading. Settlement prices for Thursday, December 7, 1995, are used for illustration (item 1). Futures quotes are used for March, May, and July 1996 contract settlement prices. 2. Monthly futures prices are the settlement prices of the nearby contracts. For example, the futures price for December 1995 (item 2) represents the December 7 settlement price of the March 1996 contract. The nearby (March) contract price is used for December because during any contract close month, the nearby contract has greater stability than the contract- close month (December), as contract liquidity decreases during the delivery month. Also, the contracts usually close about the third week of the month, which would lower the number of observations that could be used to calculate the average monthly closing price. 3. A forecast of the monthly average farm price (item 4) is computed by adding the basis (cash price minus futures price) (item 3) to the monthly futures price (item 2). Because crop years 1988 and 1991 had strong premiums for quality wheat, the bases for these 2 crop years are more representative than the average of the past 5 crop years. Therefore, the adjustment factor (basis) represents an average of the 2 crop years, 1988/89 and 1991/92. 4. The actual monthly average farm price is entered on item 5 as they become available and are used for June 1995 through November 1995. (The November monthly cash price represents a mid-month price and is updated the following month.) If this 1995-96 forecast was made during May or June 1995, all 12 monthly prices would be forecasts and item 5 would remain blank. 5. The actual and forecast farm prices are spliced together in item 6. For the present marketing year, 1995/96, six of the monthly prices shown are actual farm prices of all wheat (June through December), while the last six monthly prices are forecasts. 6. The monthly percentage of wheat marketings by producers (5-year moving average) (item 7) is used to weight the monthly farm prices (item 6). A weighted season-average and simple average farm price of wheat is then computed. Forecast for 1995/96 Crop Year Season-average price forecasts are based on expectations reflected in the futures market and, if available, actual farm prices. As of December 7, 1995, the futures method projected the 1995/96 price at $4.39 per bushel (table A). The initial forecast as of May 8, 1995 was $3.47 per bushel, slightly above the season average of $3.45 per bushel for 1994/95. Price forecasts have risen each month during the marketing year, responding to reduced global supplies and strong demand. Price premiums for good quality wheat were likely higher than usual, so futures market prices and wholesale price quotes based on good quality wheat are likely to run significantly higher than average farm prices. Similar situations were experienced in crop years 1988 and 1991, which is why the basis used for 1995 is an average of those 2 crop years. Table A--Forecasting Wheat Producers' Season-Average Price Using Futures Prices, 1995/96. _______________________________________________________________________________ Items (1) (2) (3) (4) (5) (6) (7) Current Monthly Historical Forecast Actual Spliced Monthly Months Futures 1/ Futures Basis Farm Farm Actual/ Mktg. Settlement Price Price Price Forecast Weights _______________________________________________________________________________ - - - - - - - - - - - Dollars per Bushel- - - - - - - - - Percent June '95 -0.37 3.84 3.84 12.1 July -0.31 4.11 4.11 17.4 August -0.28 4.26 4.56 10.9 September -0.42 4.53 4.53 8.3 October -0.40 4.73 4.73 7.3 November -0.32 4.82 2/ 4.82 7.0 December 5.05 -0.37 4.68 4.68 7.9 January '96 5.05 -0.47 4.57 4.57 9.7 February 5.05 -0.40 4.65 4.65 5.3 March 5.05 4.70 -0.25 4.45 4.45 5.5 April 4.70 -0.11 4.59 4.59 4.3 May 4.70 4.45 -0.11 4.34 4.34 4.3 July 4.45 ______________________________________________________________________________ Weighted Average Farm Price = $4.39/bu. Simple Average Farm Price = 4.46/bu. 1/Contract months include: July, September, December, March, and May. Futures price quotation from the Kansas City Board of Trade. December 7, 1995 settlement. 2/Mid-month price. Table 1 -- Wheat: U.S. market year supply and disappearance Item |1990/91 1991/92 1992/93 1993/94 1994/95E 1995/96P -------------------|------------------------------------------------------ Area (mil. ac.) | ARP (%) | 5.0 15.0 5.0 0.0 0.0 0.0 Nat'l total base | 90.8 89.6 89.6 89.6 88.9 88.5 CRP base retired | 10.3 10.4 10.6 10.8 10.8 10.8 Effective base | 80.5 79.2 78.9 78.4 78.1 77.7 0,50/92/85 | 5.3 5.8 4.0 5.7 5.2 6.1 Planted | 77.0 69.9 72.2 72.2 70.3 69.1 Harvested | 69.1 57.8 62.8 62.7 61.8 60.9 Yield (bu/ac) | 39.5 34.3 39.3 38.2 37.6 35.9 | Supply (mil. bu.) | Beg. Stocks | 536.5 868.1 475.0 530.7 568.5 506.6 Production | 2,729.8 1,980.1 2,466.8 2,396.4 2,321.0 2,183.4 Imports 1/ | 36.4 40.7 70.0 108.8 91.9 85.0 TOTAL | 3,302.6 2,889.0 3,011.8 3,035.9 2,981.4 2,775.0 | Use | Food | 789.8 789.5 834.8 871.7 852.5 860.0 Seed | 92.9 97.7 99.1 96.3 89.3 105.0 Feed & Residual | 482.4 244.5 193.6 271.7 344.8 225.0 Exports 1/ | 1,069.5 1,282.3 1,353.6 1,227.8 1,188.3 1,200.0 TOTAL | 2,434.5 2,413.9 2,481.2 2,467.4 2,474.8 2,390.0 | Ending stocks | 868.1 475.0 530.7 568.5 506.6 385.0 Farmer-owned | reserve | 14.0 50.0 28.0 6.0 0.0 0.0 CCC inventory 2/ | 163.0 152.0 150.0 150.0 142.0 142.0 Free stocks | 691.1 273.0 352.7 412.5 364.6 243.0 | Stocks-to-use | 35.7 19.7 21.4 23.0 20.5 16.1 | Prices ($/bu.) | Season average | 2.61 3.00 3.24 3.26 3.45 4.25-4.45 Target price | 4.00 4.00 4.00 4.00 4.00 4.00 Loan rate | 1.95 2.04 2.21 2.45 2.58 2.58 deficiency | payment rate | 1.28 1.35 0.81 1.03 0.61 3/ | Deficiency pmts. | (mil. dollars) | 2,420 2,246 1,371 1,904 1,146 | Market value | of production | (mil. dollars) | 7,184 5,957 7,984 7,812 8,007 9,498 -------------------------------------------------------------------------- Totals may not add due to rounding. E--Estimated, P--Projected. 1/ Imports and exports include flour and other products expressed in wheat equivalent. 2/ From 1981 on, includes Food Security Reserve. 3/ Based on 5-month price + 10 cents. Table 2 -- Wheat supply and disappearance by class 1/ 1994/95E |HRW HRS SRW White Durum All Wheat ------------------|-------------------------------------------------- | Area: (mil. ac.) | Planted | 34.9 17.6 9.9 5.1 2.8 70.3 Harvested | 28.7 17.0 8.5 4.9 2.7 61.8 Yield (bu/ac) | 33.9 30.3 51.3 62.1 35.6 37.6 | | Supply: (mil. bu.)| Production | 971 515 434 304 97 2,321 Beg. stocks | 227 201 45 67 28 568 Imports 2/ | 3 51 0 15 22 92 TOTAL | 1,202 767 480 386 147 2,981 | Use: | Food | 361 200 150 67 75 852 Seed | 38 20 20 7 4 89 Residual | 187 62 61 32 2 345 Total domestic | 586 282 231 107 80 1,287 Exports 2/ | 422 292 212 222 40 1,188 TOTAL | 1,008 574 443 329 121 2,475 | Ending stocks | 194 193 37 57 26 507 1995/96P |HRW HRS SRW White Durum All Wheat ------------------|-------------------------------------------------- | Area: (mil. ac.) | Planted | 33.9 15.9 10.5 5.3 3.4 69.1 Harvested | 27.8 15.6 9.2 5.0 3.4 60.9 Yield (bu/ac) | 29.8 30.2 48.9 66.7 30.5 35.9 | | Supply: (mil. bu.)| Production | 828 470 450 334 102 2,183 Beg. stocks | 194 193 37 57 26 507 Imports 2/ | 2 43 0 18 22 85 TOTAL | 1,023 706 486 409 150 2,775 | Use: | Total domestic | 502 264 220 117 87 1,190 Exports 2/ | 385 315 240 220 40 1,200 TOTAL | 887 579 460 337 127 2,390 | Ending stocks | 136 127 26 72 23 385 --------------------------------------------------------------------- Totals may not add due to rounding. E--Estimated, P--Projected. 1/ ERS estimates of area, yield, and domestic use. Table 3 -- Wheat: Quarterly supply and disappearance (1,000 bu.) ----------|---------------------------------------------------------------- Market |Produc- Year | tion Imports Supply Food Seed Feed Exports E.stocks | 1/ 1/ ----------|---------------------------------------------------------------- | 1992/93: | Jun-Aug | 2,467 20 2,962 211 1 346 283 2,121 Sep-Nov | 0 16 2,137 219 63 (82) 345 1,592 Dec-Feb | 0 17 1,609 197 3 5 356 1,048 Mar-May | 0 16 1,064 208 32 (75) 370 531 Mkt. year| 2,467 70 3,012 835 99 194 1,354 531 | 1993/94E | Jun-Aug | 2,396 15 2,942 211 1 296 301 2,133 Sep-Nov | 0 30 2,163 225 61 (38) 329 1,586 Dec-Feb | 0 27 1,613 211 2 39 332 1,028 Mar-May | 0 37 1,065 224 32 (25) 266 568 Mkt. year| 2,396 109 3,036 872 96 272 1,228 568 | 1994/95E | Jun-Aug | 2,321 31 2,920 213 2 376 260 2,069 Sep-Nov | 0 21 2,091 229 61 (29) 338 1,491 Dec-Feb | 0 18 1,509 202 2 26 310 969 Mar-May | 0 22 991 209 24 (28) 280 507 Mkt. year| 2,321 92 2,981 852 89 345 1,188 507 | 1995/96P | Jun-Aug | 2,183 23 2,713 215 8 306 303 1,881 Mkt. year| 2,183 85 2,775 860 105 225 1,200 385 --------------------------------------------------------------------------- Totals may not add due to rounding. E--Estimated, P--Projected. 1/ Imports and exports include flour and selected products expressed in wheat equivalent. Table 4 -- Wheat: Food disappearance (1,000 bu.) October 1995 | June July August September October 1994 --------------|---------------------------------------------------------- Mill grind +| 71,833 69,818 77,716 74,042 78,441 77,850 Food exports -| 2,925 5,115 7,555 2,421 3,249 Food imports +| 1,807 1,866 1,690 1,403 1,671 Non-flour | food use +| 2,000 2,000 2,000 2,000 1,900 Food use | 72,715 68,569 73,851 75,024 78,172 ------------------------------------------------------------------------- Source: Department of Commerce, Bureau of Census. Wheat flour an converted to wheat grain equivalent. Non-flour food use is ERS estimate. Table 5 -- Wheat: Farm prices and prices at selected markets ($/bu.) --------------------- Farm Prices ---------------------- All wheat Winter wheat Durum Other spring Month | 94/95 95/96 94/95 95/96 94/95 95/96 94/95 95/96 ------|----------------------------------------------------------------- Jun | 3.21 3.84 | 3.09 3.77 | 4.59 5.20 | 3.51 3.78 Jul | 3.04 4.11 | 2.99 4.07 | 4.32 5.29 | 3.28 4.26 Aug | 3.25 4.26 | 3.23 4.22 | 4.30 5.33 | 3.19 4.19 Sep | 3.57 4.53 | 3.57 4.47 | 4.51 5.87 | 3.38 4.27 Oct | 3.76 4.73 | 3.79 4.72 | 4.89 5.83 | 3.52 4.47 Nov 1/| 3.75 4.82 | 3.76 4.79 | 4.88 5.81 | 3.51 4.62 Dec | 3.74 | 3.75 | 4.67 | 3.56 Jan | 3.69 | 3.67 | 4.58 | 3.51 Feb | 3.61 | 3.61 | 4.68 | 3.40 Mar | 3.52 | 3.47 | 4.61 | 3.38 Apr | 3.49 | 3.45 | 4.48 | 3.34 May | 3.66 | 3.65 | 4.82 | 3.53 ------------------------------------------------------------------------ KC HRW #1 KC HRW #1 St. Louis Portland ordinary 13% prot. #2 SRW #1 soft white Month | 94/95 95/96 94/95 95/96 94/95 95/96 94/95 95/96 ------|----------------------------------------------------------------- Jun | 3.60 4.72 | 3.85 4.90 | 3.22 3.90 | 3.64 4.65 Jul | 3.48 4.98 | 3.63 5.24 | 3.11 4.35 | 3.52 4.94 Aug | 3.70 4.76 | 3.78 5.01 | 3.31 4.13 | 3.71 4.65 Sep | 4.05 5.00 | 4.12 5.26 | 3.69 4.56 | 4.32 4.96 Oct | 4.31 5.28 | 4.37 5.59 | 3.89 4.92 | 4.61 5.17 Nov | 4.24 | 4.31 | 3.84 | 4.54 Dec | 4.27 | 4.32 | 4.00 | 4.49 Jan | 4.06 | 4.07 | 3.83 | 4.33 Feb | 3.98 | 4.01 | 3.74 | 4.23 Mar | 3.87 | 3.91 | 3.59 | 3.98 Apr | 3.86 | 3.95 | 3.55 | 4.08 May | 4.22 | 4.35 | 3.62 | 4.45 ------------------------------------------------------------------------ Minn. Minn. FOB Gulf Average EEP DNS 14% durum $/ton (HRW) bonus $/ton 2/ Month | 94/95 95/96 94/95 95/96 94/95 95/96 94/95 95/96 ------|----------------------------------------------------------------- Jun | 4.20 4.89 | 5.76 7.16 | 139 170 | 43.28 12.71 Jul | 4.14 5.52 | 5.19 7.49 | 138 190 | 42.18 4.35 Aug | 4.00 5.06 | 5.30 6.35 | 148 185 | 36.39 0.00 Sep | 4.27 5.27 | 6.16 7.26 | 159 194 | 37.61 0.00 Oct | 4.40 5.52 | 6.64 6.76 | 167 204 | 26.82 0.00 Nov | 4.41 | 6.61 | 162 203 | 22.44 0.00 Dec | 4.37 | 5.99 | 165 | 18.65 Jan | 4.21 | 6.23 | 156 | 15.26 Feb | 4.09 | 5.91 | 154 | 9.91 Mar | 4.11 | 5.87 | 150 | 15.20 Apr | 4.30 | 5.64 | 149 | 20.52 May | 4.61 | 6.47 | 159 | 23.95 ------------------------------------------------------------------------ Source: NASS & AMS, USDA. 1/ Mid-month. 2/ Weighted avg., all classes. Table 6 -- Wheat: Exports and Imports U.S. wheat exports, 1994/95: (1,000 bu.) September 1995 | Jun July August September 1994 --------------|-------------------------------------------------- Wheat grain | 78,355 88,649 119,797 131,424 117,555 Wheat flour | 2,822 5,018 7,520 2,249 3,407 Products | 113 115 146 186 130 Total | 81,290 93,783 127,463 133,859 121,091 U.S. wheat imports, 1994/95: (1,000 bu.) September 1995 | Jun July August September 1994 --------------|-------------------------------------------------- Wheat grain | 6,626 5,895 4,832 4,494 5,253 Wheat flour | 650 597 562 594 599 Products | 1,161 1,270 1,130 811 769 Total | 8,436 7,762 6,524 5,899 6,621 ----------------------------------------------------------------- Source: Department of Commerce, Bureau of Census. Wheat flour and products converted to wheat grain equivalent. Table 7 -- Wheat: U.S. exports (1,000 metric tons) 1/ ------------------------------------------------------------------------------- |1993/94 1993/94 |1994/95 1994/95 | 1995/96 -----------|---------------------------------|--------------------------------- | Export | Export | as of 11/30/95 2/ | | Sales2/| Sales 2/| ------------------- | | Final Final | Final Final | Out- Total | |Census Ship- |Census Ship- |Ship- standing commit-|USDA Country | total ments | total ments |ments sales ments |forecast -----------|---------------------------------|------------------------|-------- | | | Algeria | 1,301 1,323 | 522 547 156 25 181 | China | 1,887 1,933 | 3,061 3,347 | 1,720 0 1,720 | Egypt | 2,975 2,787 | 5,432 5,427 | 2,726 1,057 3,783 | FSU | 2,659 1,394 | 1,284 928 | 114 79 194 | Japan | 3,266 3,014 | 3,053 3,544 | 1,640 605 2,245 | S. Korea | 1,544 1,459 | 1,578 1,557 | 670 437 1,107 | Morocco | 1,348 1,304 | 137 116 | 251 117 367 | Nigeria | 1,076 1,050 | 563 631 | 481 120 601 | Pakistan | 1,834 1,447 | 1,416 1,414 | 812 231 1,044 | Philippines| 1,883 1,739 | 1,752 1,852 | 1,065 401 1,465 | | | | | Total grain| 32,038 27,561 | 30,597 30,027 | 16,908 5,860 22,768 | | | | | Total (incl| | | | products)3/| 33,414 28,268 | 33,067 30,817 | 17,185 5,867 23,052 | 32,659 ------------------------------------------------------------------------------- 1/ June - May. 2/ U.S. Export Sales Report. 3/ Grain equivalent basis. END-END-END