The Hightower Report

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NEAR-TERM MARKET FUNDAMENTALS: Traders said that short covering ahead of today’s USDA reports was responsible for the strength in wheat yesterday and overnight. Traders are looking for spring wheat plantings to drop near 500,000 acres from last year’s total of 14.135 million acres which will push total acres planted to wheat down near 4.5 million acres from the 2008 total of 63.147 million acres. These reports are not expected to be as influential for KC and Chicago wheat as they are for corn and soybeans, although a surprise is possible on the Quarterly Stocks Report. Weather remains a market factor this week with additional rains expected in the northern Plains and much of the Midwest. This is expected to start today in the west and move east through Friday. The central Plains are expecting moderate rains over the next few days, but forecasters say that it is unclear whether the still-dry areas of the SW Plains will see much additional relief. State crop condition reports show little or no improvement so far in the winter wheat crop through Sunday, although the numbers should look better next week according to one analyst. Texas dropped to 64% poor-to-very-poor despite light to moderate rains over the past week. Oklahoma also remains in poor condition with the good-to-excellent rating at just 26%. However, conditions are better as one moves north. Kansas wheat is at only 42%% good-to-excellent, although this is down from 43% last week. Nebraska, is at 68% good-to-excellent. Soft red wheat areas are primarily good-to-excellent with adequate to ample soil moisture levels in most areas. The Egyptian government indicated today that it will probably allow imports of wheat from Ukraine starting with the new crop year on July 1. Imports have been banned from Ukraine this year due to poor quality. This adds to the competitive pressures on high-priced US wheat. This week’s export inspections were 15 million bushels, down from last week’s total of 22.17 million. This was below trade expectations, but it still remained slightly above the average needed each week to reach the USDA’s projection for the marketing year. Cumulative exports have reached 85.9% of the projected total compared to the 5-year average of 80.8%. China’s Ministry of Agriculture reported yesterday their winter wheat crop is experiencing increased incidence of stripe rust, a fungus that affects yield. As of the middle of last week, the area affected was up 52% over last year at 1.39 million hectares.

CASH NEWS AND TENDERS: Jordan is tendering for 100,000 tonnes of wheat. A South Korean firm has bought 22,000 tonnes of US wheat. An Israeli consortium is tendering for 25,000 tonnes of wheat. Egypt is tendering for between 25,000 and 60,000 tonnes of optional origin wheat for late April shipment. The United Arab Emirates is tendering for 40,000 tonnes of milling wheat from optional origins. Iraq is tendering to buy at least 50,000 tonnes of wheat.

WEATHER: Additional rains expected in the northern Plains and much of the Midwest starting today in the west and moving east through Friday. The central Plains are expecting more moderate rains over the next few days, but forecasters say that it is unclear whether the still-dry areas of the SW Plains will see much additional relief.

TODAY’S GUIDANCE: Wheat was the strongest grain market yesterday following last week’s hard break, and it may act somewhat independently from corn and soybeans today if those markets see a surprise on the USDA reports. Big world stocks, good crop weather in most areas and aggressive competition in the export market will continue to keep the pressure on in wheat over the longer term, but a quick rally is not out of the question.

TODAY’S MARKET IDEAS: The trend is clearly lower, but this does not rule out a rally to near 535 in the May contract.

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NEAR-TERM MARKET FUNDAMENTALS: The lower dollar and higher crude oil markets helped to support the soybean complex overnight according to traders. However, one analyst pointed out that all other influences may well be overwhelmed by today’s all-important Planting Intentions Report. The consensus estimate for US soybean planted area is just over 79 1/2 million acres, although some trade estimates are in record territory at well over 80 million. Argentina’s Agriculture Secretariat estimated 2008/09 soybean production there at 37 to 39 million tonnes yesterday as compared with the USDA forecast at 43.00 million. This compares to 46.2 million last year. This report has been delayed in recent months, adding to the controversy over government policy there. Trade sources in Argentina report that grain flows are resuming after the end of last week’s strike by farmers. China’s Ministry of Agriculture reports that stem rot, a fungus affecting rapeseed is up nearly 50% versus last year to 1.43 million hectares. This year’s planted area is pegged at 7 million hectares. An active weather system is expected to bring showers and thunderstorms to the Midwest over the next 10 days with Delta seeing even more activity over the short term. This week’s export inspections were 23.453 million bushels versus 25.916 last week. This was in line with trade expectations. Total inspections to-date stand at 78.3% of the USDA’s projected total, right in line with a 5-year average of 78.2%. Inspections need to average just 11.3 million bushels each week to reach the USDA projection. South Korea bought 20,000 tonnes of non-GMO US soybeans today.

CASH NEWS AND TENDERS: South Korea bought 20,000 tonnes of non-GMO US soybeans today. Egypt is tendering for 25,000 tonnes of soy oil and 15,000 tonnes of sunflower oil.

WEATHER: Cooler temperatures and scattered showers are forecast in Argentina over the next few days. Somewhat drier weather is forecast for the period in Brazil. In the US, an active weather system is expected to bring showers and thunderstorms to the Midwest over the next 10 days with Delta seeing even more activity over the next few days.

TODAY’S GUIDANCE: Outside markets provided some support overnight, but this morning’s USDA Planting Intentions and Quarterly Stocks reports should overwhelm all other factors during the day session. Cash market sources report that fewer farmers have made planting decisions at this point than is normally the case, which could make today’s numbers a continued source of market debate as farmers continue to weigh their options.

TODAY’S MARKET IDEAS: The market has a habit of absorbing big surprises on USDA reports within one day, two at the most. Often, this is followed by a move in the opposite direction.

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NEAR-TERM MARKET FUNDAMENTALS: The corn market found support overnight from outside markets and very light farmer selling ahead of today’s Planting Intentions and Quarterly Grain Stocks reports. Those reports are expected to be the dominant price factor today. Traders are looking for corn planted acreage just below 84.5 million acres versus 86.0 million last year, but the range of estimates runs from 80 to 89 million. Wet weather in the Midwest may cause continued debate over acreage according to one analyst with the next 10 days expected to bring active showers and thunderstorms that could bring delays in fieldwork and even planting. This week’s export inspections were 35.785 million bushels in corn, up from last week’s total of 31.278 million and above trade expectations. Total inspections to-date stand at 54.6% of the projected total for the marketing year versus a 5-year average of 55.8%. Argentina’s Agriculture Secretariat estimated 2008/09 corn production at 12.5 to 13.8 million tonnes, unchanged from their previous estimate and this compares with 13.5 million from the USDA

CASH NEWS AND TENDERS: An Israeli firm is tendering for 25,000 tonnes of corn.

WEATHER: Cooler temperatures and scattered showers are forecast in Argentina over the next few days. Somewhat drier weather is forecast for the period in Brazil. In the US, an active weather system is expected to bring showers and thunderstorms to the Midwest over the next 10 days with Delta seeing even more activity over the next few days.

TODAY’S GUIDANCE: The USDA Planting Intentions and Quarterly Stocks reports should outweigh all other factors today and possibly into tomorrow. However, even the biggest surprises often run out gas after the second day, so we do not expect the reports to be major trend-setters, barring a major bearish surprise. It is also worth noting that farmers appear to be less committed to a planting decision than is normally the case at this point in the year, meaning that the debate over acres may pick right back up after today

TODAY’S MARKET IDEAS: If today’s numbers are near the trade estimates, we may see a push back up to near 400 in the May contract.

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CRUDE OIL MARKET FUNDAMENTALS: Crude oil has fallen back in the overnight trade as fresh jitters over the demand outlook has triggered more extensive profit taking. The market has come under fresh selling pressure on concerns that the economic recession will be extended if some auto companies are forced into bankruptcy now that the Obama task force rejected plans by both GM and Chrysler. Rising investor risk aversion has sent equity markets sharply lower overnight and the dollar higher inspiring additional selling in oil. With at least one OPEC member saying a production cut is unlikely at the May meeting, this news may also be inspiring some of the profit taking. We also suspect the oil market is being weighed down by evidence of a further deterioration in the macroeconomic outlook with Japan’s industrial output falling 9.4% in February and the OECD predicting a 4.2% economic contraction in its 30 nation bloc. With China also reporting fuel stocks at record high levels in February and OPEC compliance appearing to have slipped a bit in March certainly makes it difficult to justify oil prices over $55 per barrel, especially if the economic outlook begins to sour again. It is also clear that June crude oil had become technically overbought near last week’s highs which was certainly reflected in the March 24th COT report with options for crude oil showing the “combined” spec and fund net long position at 103,835 contracts as of early last week, up nearly 30,000 contracts from levels seen at the beginning of the month. Unless a more optimistic outlook for an economic recovery can be revived, the bearish internal supply/demand setup for oil and negative outside market influences could pressure June crude back to test the pivotal $50 price level, especially since the trade seems to be expecting another rise in crude oil stocks in this week’s inventory report.

GASOLINE: The US auto industry news has triggered more selling in the gasoline market in the overnight trade. In fact, the highs reached last week in June gasoline appear to be a bit overpriced considering the prospects for the economy and oil demand to further deteriorate if two out of three major auto companies are forced into bankruptcy. The March 24th COT report with options for gasoline also showed the market had become overbought with the combined fund and spec net long position rising to 62,659 contracts as of early last week. Seeing June gasoline falling below last week’s low could also give the bear camp some addition technical leverage to start the week leaving the market vulnerable to a correction possibly back to the $1.40 price level.

HEATING OIL: June heating oil has extended last Friday’s price slide in the overnight trade as last week’s economic optimism has shifted to an increasingly bearish global economic view. Heating oil is certainly being weighed down by the economic news from Japan and fresh jitters over the US auto sector. But it is also clear that ample distillate supplies in the US and the 11.4% rise in refined product stocks in China last month leaves the global fuel demand outlook weak which could pressure June heating oil back to test support near $1.35 per gallon price level. This market has also become technically overbought as the March 24th COT report with options for heating oil showed the “combined” spec and fund net long position at 33,473 contracts as of early last week, more than double the net long position seen at the beginning of the month.

TODAY’S ENERGY MARKET GUIDANCE: The market’s technically overbought condition leaves the energy complex vulnerable to a deeper sell off if the economic outlook remains soured by the newest auto industry threat.

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The copper market was clearly fundamentally overbought into last week’s highs. In fact, demand expectations for copper were seemingly at direct odds with reality and therefore the sharp reversal this morning in prices, seems fully justified. With renewed fears of a noted downsizing of the US auto sector again one gets the impression that US demand for copper is, for the time being, more than capable of offsetting the anticipated demand from China. Just to add to the negative tilt this morning, is news of higher Zambian copper production predictions for 2009. Also adding into the negative tilt for copper prices is the fact that the US Dollar strength is prompting pressure in a host of physical commodity markets. While the March 24th Commitment of Traders with Options report for Copper showed the Non-commercial position to be net short 18,639 contracts, with the Non-reportable position net long 2,542 contracts, and that made the “combined” spec and fund position net short 16,097 contracts as of early last week, we doubt that the technical condition of the copper market is capable of countervailing the distinctly bearish fundamental setup in the marketplace. In looking at other news flow this morning, the market was presented with evidence of rising Japanese copper export data and perhaps Chinese demand forecasts that failed to live up to recent bullish expectations. Therefore, the path of least resistance in copper prices today is pointing downward, with the 1.7500 level initial support, but a slide down to 1.7080 would also seem possible when one considers all the negatives facing the copper market today.

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OUTSIDE MARKET DEVELOPMENTS: With the Dollar reaching the highest level since March 18th in the early morning action today, equity prices sharply lower and a host of physical commodity markets under noted pressure, one gets the sense that the outside market forces are weighing heavily on precious metals prices into the US opening today. One almost gets the sense that the US auto sector uncertainty has rekindled concerns of too much slowing. In fact, it would almost seem like sentiment has shifted away from inflation and back in the general direction of deflation. Surprisingly the gold market didn’t seem to give much credence to an attempt to rally Indian gold prices overnight. Even more surprising is that gold was also unmoved by the sharp gains in the Yen, which in the recent past has been a sign of increased flight to quality anxiety. Perhaps the gold market is seeing some weakness off fears of the upcoming G20 meeting, which some traders think might result in some renewed talk of gold sales from that entity. With the US scheduled to release a regional Fed manufacturing reading this morning and the concern for the US auto sector already dominating the headlines overnight, it is likely that the metals trade is simply fearful of a negative reaction to the US data flow this morning. In short, the outside market bias seems to be favoring the bear camp in the early going today.

MARKET FUNDAMENTALS: The silver market is clearly being undermined this morning as a result of weaker gold market and a stronger US Dollar. Some players were concerned that May silver fell below $13.00 in the early going today, perhaps because both precious and industrial metals prices were under clear pressure this morning. In conclusion, it would not appear that the silver market is set to get much support from the precious metals market action or even from industrial metals market action this morning. With the US Dollar also showing signs of overt strength, even the currency market impact on silver prices looks to favor the bear camp into the start of the new week. In the near term, the silver market probably looks to discount physical supply and demand news again and instead look to the direction of gold prices and perhaps even to the direction of equity prices for a large portion of its near term price direction.

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OUTSIDE MARKET DEVELOPMENTS: With the Dollar reaching the highest level since March 18th in the early morning action today, equity prices sharply lower and a host of physical commodity markets under noted pressure, one gets the sense that the outside market forces are weighing heavily on precious metals prices into the US opening today. One almost gets the sense that the US auto sector uncertainty has rekindled concerns of too much slowing. In fact, it would almost seem like sentiment has shifted away from inflation and back in the general direction of deflation. Surprisingly the gold market didn’t seem to give much credence to an attempt to rally Indian gold prices overnight. Even more surprising is that gold was also unmoved by the sharp gains in the Yen, which in the recent past has been a sign of increased flight to quality anxiety. Perhaps the gold market is seeing some weakness off fears of the upcoming G20 meeting, which some traders think might result in some renewed talk of gold sales from that entity. With the US scheduled to release a regional Fed manufacturing reading this morning and the concern for the US auto sector already dominating the headlines overnight, it is likely that the metals trade is simply fearful of a negative reaction to the US data flow this morning. In short, the outside market bias seems to be favoring the bear camp in the early going today.

GOLD MARKET FUNDAMENTALS: The bull camp has to be a little disappointed with the weaker price track early this morning, as one might have concluded that macro economic uncertainty was on the rise again. However, with a G20 meeting later this week and some players fearful of G20 gold sales talk surfacing this week, there would seem to be a number of potential bearish fundamental events looming ahead for the gold market. While the bulls will point out ongoing record ETF gold in trust holdings, the bear camp will point out that June gold prices to this morning’s low are already almost $100 an ounce below the February highs and that could be turning up the pressure on all gold longs. With the June Dollar Index showing signs of regaining its footing and the fear of severe slowing returning to the marketplace, it would seem to be much easier to embrace the prospect of deflation, than to embrace the threat of inflation. Just to add to the bearish early tilt in gold prices, the gold market was also presented with news of rising 3rd quarter gold production at Gold Fields, but some of that influence might have been known in the market at the end of last week.

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A firm dollar this week and ideas that India tightening supply may not be as serous as fist believed leaves the market vulnerable to some additional short-term long liquidation selling from speculators. The market experienced an early rally yesterday led by higher energy and a firm stock market but there was a lack of new interest from speculators and demand concerns helped to pressure. Demand concerns emerged from the talk that the May sugar has lost significant ground to the July contract in recent weeks with July at a 9 point premium on February 26th as compared with a 67 point premium yesterday. With bear spreads working well, traders are concluding that spot demand is weak. May closed slightly lower on the session yesterday but more than 25 points off of the early highs and moved to the lowest level since March 12th. Vietnam sugar production is expected to fall near 17% this year to 951,000 tonnes. Ideas that India may not need to import white sugar at zero duty and that imported raw sugar needs may not be as high as expected helped to pressure the market. Premiums traded for Thailand sugar on the world market fell to near 40-50 points over New York this week as compared with 65 points over last week. With cheap freight and the Brazil harvest just around the corner, traders see a lack of tightness on the world market for exportable surplus sugar despite the outlook for a world production deficit. Ideas that world demand may not be as robust as anticipated added to the long liquidation trend.

TODAY’S GUIDANCE: The market seemed to have the fundamentals to move out of the recent consolidation early this week but the failure leaves futures vulnerable to long liquidation selling from the spec. Tonight’s COT report may give traders a better indication of the extent of the overbought condition.

TODAY’S MARKET IDEAS: May sugar close in resistance is at 12.96 and if 12.75 can not hold as support, a 50% correction of the Oct-Feb rally leaves next support at 12.38.

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The market looks vulnerable to a further downside downside break into next week with the firm US dollar and better weather in the Ivory Coast helping to pressure the market and helping to ease supply fears. Demand fears seem to be on the rise as talk of higher European stocks this week rekindled the concern of slackening global cocoa/chocolate demand. In our opinion, the chocolate industry as a whole recently saw many manufacturers reduce serving sizes, reduce chocolate percentages or even began to use cocoa substitutes and that in conjunction with the slackening global economy might be starting to catch up to the cocoa market. The cocoa market attempted an upside breakout yesterday but was unable to sustain the rally. Strength in the Dollar and ongoing demand side concerns appear to have the market in a limited posture. In fact, seeing the May cocoa contract repeatedly fail to rise above the $2,626 level might signal a lack of bullish resolve. The Ivory Coast seemed to be getting quite a bit of rain in the coming session but some rain would be initially beneficial to the crop and only minimally negative to prices. Technically, momentum indicators are showing an overbought condition and the declining open interest (118,787 on March 11th to 109,744 yesterday) suggests that the foundation of the recent rally is short-covering. In addition, the market seems to have gapped below the uptrend channel overnight which adds to the possibility of increased long liquidation selling over the near-term.

TODAY’S GUIDANCE: Near term resistance for May cocoa comes in at $2,562 with $2,463 and $2,412 as next support.

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For the second time this week, July coffee closed right on a key resistance point and the sharp sell-off from the highs yesterday leaves the appearance that a near-term high is in place. The market needs a higher close today or futures will look somewhat vulnerable to a near-term correction. The outlook for tightening supply in the months ahead should help support but key robusta producers Indonesia and Vietnam continue to sell. July coffee closed slightly higher on the session yesterday and moved to the highest level since February 11th as outside market forces helped to support the market. A set-back in other soft markets like cocoa and sugar helped drag the market near 150 points off of the early highs. A continued slide in exchange stocks and ideas that stocks at producing countries are tightening in the months just ahead helped to support. Indonesia coffee discounts to London futures expanded in the past week as more producer selling emerged and there seems to be plenty of competition with Vietnam to move coffee on the world market now. Vietnam officials revised their coffee production forecast for the 2008 crop to 17.76 million bags, up 6.4% from their previous forecast but this is not a big surprise to the trade. Brazil exports for the March 1st to 25th time frame hit 1.644 million bags as compared with 1.807 million last month for the some time frame. Exchange stocks were down 7,401 bags to 4.012 million with 800 bags pending review.

TODAY’S GUIDANCE: Short-term resistance for July coffee comes in at 119.45 with support back at 116.95 and 114.55.

TODAY’S MARKET IDEAS: Consider taking profits on long positions and hold out for a correction before re-entry.