The Hightower Report

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The short-term trend looks to remain down over the near-term, but the downside may be somewhat limited as futures already hold a decent discount to the cash market, and global economic growth and “less fear” of a slowdown in global growth could provide some support if exports remain strong. Exports represent nearly 20% of the total pork production. Weekly slaughter should continue to climb, and is already at the highest level since April and should post highs for the year in early December. October hogs closed slightly higher on the session yesterday, but down 120 points from the highs. The pit trade has closed in the vicinity of the lows for five sessions in a row. Weakness in the cash market and ideas that slaughter will continue to increase in the weeks ahead helped to pressure. The market pushed lower and matched Friday’s lows and the lowest level since August 17th, but a lack of new selling interest and a strong recovery in financial and metal markets helped provide some underlying support. There was some buying based on the steep discount to the cash market, and the move over Monday’s highs activated buy-stops and the market surged to sharply higher on the day into the mid-session. Cash hogs came in steady to $1.00 lower; about as expected in some locations but higher in the west. The estimated hog slaughter came in at 408,000 head yesterday, which was lower than expected and could be showing a weaker demand tone from the packer. Traders are a bit nervous that demand will not keep pace with the rising seasonal supply into the 4th quarter, and that this could back-up some animals in the country unless exports can remain strong. This brings the total slaughter for the week so far to 819,000 head, up from 815,000 head last week at this time but down from 868,000 head a year ago. The CME Lean Hog Index as of August 27th came in at 83.89, down 47 cents from the previous session and down from 84.13 the week before. This leaves October hogs at an 875 point discount to the cash market. Pork cutout values released after the close yesterday came in at $91.23, down $2.03 from Monday and down from $96.74 the previous week. This is the lowest pork value since August 16th, and pork values are down 5.7% from last week’s all-time high. Loin prices were down sharply and rib prices fell $9.12 to $123.51, which may be a strong indication that retailers are done booking product for weekend sales.

TODAY’S GUIDANCE: The technical action remains weak, and the COT report showed fund traders holding a net long position of near 48,000 contracts, so some additional long liquidation selling is still possible if support is violated. Next support for October hogs comes in at 73.97 and then 72.10, with 75.20 and 75.97 as resistance.

TODAY’S MARKET IDEAS: The market looks vulnerable to more fund trader long liquidation selling over the near-term.

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After a contract high on August 24th, October futures have closed lower for six sessions in a row and are down again overnight. Seasonal weakness in beef and cash markets along with indications that speculators hold a massive net long position, have traders nervous of a continued long liquidation sell-off over the near-term. October cattle closed sharply lower on the session yesterday, as stops were activated on the late break below last week’s lows to drive the market to the lowest level since August 18th. Traders believed that there was aggressive long liquidation selling at the end of the month, as fund traders lightened up on their enormous net long position posted in the last COT report. As of August 24th, non-commercial traders were net long 134,766 contracts. A turn up in the stock market helped to provide underlying support, and strength in the hog market added to the positive tone, but the market lacked new buying interest yesterday and retreated from the early highs. News that packer bids emerged at just $97.00 versus offers at $102.00 yesterday may have been seen as a slight negative. Nebraska cattle bids were only $96.00, as compared with $99.00-$99.50 last week. The discount of futures to cash and a lack of new deliveries helped to provide some underlying support for the early bounce as well. August cattle expired at 97.25 yesterday. The estimated cattle slaughter came in at 130,000 head yesterday. This brings the total for the week so far to 260,000 head, up from 256,000 head last week at this time and up from 259,000 head a year ago. Boxed beef cutout values were up 32 cents at mid-session yesterday, but closed 10 cents lower at $163.64. This was up from $163.60 the prior week. There were 4 new deliveries overnight.

TODAY’S GUIDANCE: We remain concerned with the massive net long position of fund traders, and the impact on the market “if” cattle become out of favor by large commodity fund traders. Outside markets look supportive today, but the selling could still increase if support levels are taken out. Close-in resistance for October cattle is at 98.05 and 98.57, with 96.67 and 95.87 as support. Uptrend channel support comes in at 96.87 today, and selling could intensify if this level is violated.

TODAY’S MARKET IDEAS: Wait for a more significant set-back to buy October or December cattle. For now, the market is overbought and vulnerable to fund long liquidation selling.

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NEAR-TERM MARKET FUNDAMENTALS: Wheat posted substantial gains overnight after wheat prices in Germany moved to a 28-month high on worries over the effects of a rainy harvest season. The poor harvest co0nditions are leading to ideas that half of this year’s German wheat crop could be reduced to feed quality. This comes as demand for wheat remains strong in the huge North African and Middle Eastern import market. The EU cleared well over 800,000 tonnes of wheat for export last week and the strong pace of exports along with the potential losses in Germany are causing some worries about the sustainability of large scale EU wheat exports into the Mediterranean basin in coming months. Morocco is in the market for 167,500 tonnes of milling quality wheat. With a short crop, Morocco will cancel duties on imports of soft wheat from September 16th to December 31st which is expected to boost import demand and help secure a good supply on the domestic market. Pakistan’s minister for food and agriculture said today that the country is deferring plans to export its wheat surplus this year. Traders said that this was not a surprise following weeks of devastating floods that may have wiped out 500,000 tonnes of wheat stocks in addition to damaging some cropland. Neighboring India has still not indicated that it will move to export its large wheat surplus although an Indian firm is offering wheat to Bangladesh against its tender for 50,000 tonnes. The US and Canada are moving into their harvest seasons for spring wheat. Given this year’s weather problems in Europe, traders indicate that the market will be concerned over any substantial rains in the US northern Plains or the Canadian Prairie. For now, conditions in Canada are mainly dry to favorable, with crop development running behind normal. In addition, Australia’s western wheat belt is still suffering from a substantial moisture deficit in some areas. This region produces about half of the country’s wheat crop and the bulk of its exportable surplus. The Commitments of Traders report for the week ending August 24th showed continued buying by trend-following (managed) funds. They were net buyers of 2,083 contracts to shift to a net long position of 1,466. This is the first time these traders have been net long in wheat since early 2008. Tomorrow is First Notice Day for the September wheat futures contract.

TODAY’S GUIDANCE: Crop weather remains worrisome in a number of key growing areas around the world, not the least of which is still Russia which needs more rain in order to have a successful launch of its winter grain crops in the next few weeks. A recent bias to the short side by traders may result in further short covering in wheat, especially if the dollar moves lowers and North Africa continues to buy. First support in the December contract is at 688 3/4 and then at 677 1/2 to 680 with next support near 663 3/4. Resistance is at 708 to 712 and then at 738 to 740.

TODAY’S MARKET IDEAS: There seems to be enough weather issues (Germany, Argentina and Australia) along with strong demand to secure inventory from importers to provide support over the near-term with first key technical resistance at 750 1/4 and then 772 3/4, a 50% correction of the August 6th to August 18th break.

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NEAR-TERM MARKET FUNDAMENTALS: Hot weather in the Eastern Corn Belt this weekend with no rain in the forecast until Wednesday has helped futures build a weather premium in for the tail end of the growing season. Traders remain concerned that many areas of Indiana and Ohio were too dry recently and any filling soybeans which are not maturing could have seen a negative impact on yield. Hot weather in the southern Midwest along with sudden death syndrome in Iowa are also seen as trouble spots. Traders will be monitoring the weekly crop progress report tonight to see if the crops continued to deteriorate in the past week. Last week, 64% of the crop was in good to excellent condition as compared with 69% last year and 57% as the ten year average for this time of the year. The USDA currently projects a 44 yield, the same as last year. November soybeans pushed sharply higher for the second session in a row on Friday closing 22 cents higher for the week. This took the market to its highest level since August 19th. Impressive gains in equities added to the positive tone in a number of markets, along with the announcement of a fresh sale of 120,000 tonnes of US soybeans to China by the USDA. Basis levels in the interior were mixed. Early harvested soybeans from the Delta moved onto the cash markets at an accelerated pace last week and that brought a downturn in basis levels at the Gulf during mid week through Friday. A Taiwanese buyer bought 57,500 tonnes of US soybeans for delivery during the first half of November. The Commitments of Traders Futures and Options report as of August 24th for Soybeans showed Non-Commercial traders were net long 130,965 contracts, a decrease of 8,029 contracts for the week. The selling trend is seen as a short-term negative force. Commodity Index traders held a net long position of 184,507 contracts, down 2,704 contracts for the week. In soybean oil, Non-Commercial traders were net long 31,659 contracts, a decrease of 16,219 contracts. Non-Commercial and Nonreportable combined traders held a net long position of 43,835 contracts, down 19,658 contracts for the week and the aggressive selling was seen as a short-term negative force. Commodity Index traders held a net long position of 100,297 contracts, down 5,506 contracts for the week. In meal, Non-Commercial traders were net long 67,425 contracts, a decrease of 3,777 contracts. Non-Commercial and Nonreportable combined traders held a net long position of 85,854 contracts, down 2,778 contracts for the week.

TODAY’S GUIDANCE: The COT reports showed that the turn in the weather came just in time for the markets to avoid a significant sell-off of the large net long positions from fund traders in the soybean complex. Yield forecasts will become increasingly important and without a drop of more than 1 1/2 to 2 bushels per acre from last months USDA estimate of 44, the market may struggle with hefty supply into the futures with a forecast for record world ending stocks based on the assumption that Brazil and Argentina production will be down 8 1/2 million tonnes from this year. This means the market is already counting on either a sharp reduction in yield in the US or a continued La Nina drought situation in South America.

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NEAR-TERM MARKET FUNDAMENTALS: December corn pushed higher overnight, moving through the high set on January 12th following a very bearish Quarterly Grain Stocks report. This marked the third straight day of higher highs in the December contract and it followed a new high for the July-August rally on Friday. Traders said that Friday’s gains came on a supportive tone from outside markets along with reports that early yields for corn are coming in at lower than expected levels. Analysts have lowered their yield forecasts to below 164 bushels per acre from the 165 bushels per acre forecast by the USDA on its August Crop Production report. Each drop of 1 bushel per acre in the yield would reduce the overall crop by 81 million bushels. Outside markets were more mixed/neutral overnight. Above normal temperatures have returned to the Corn Belt with readings above 90 expected in the eastern Corn Belt today. This area of heat is expected to expand tomorrow to include parts of the central Corn Belt, the mid south, and parts of Missouri and the most of the central Plains. A cold front is expected on Wednesday and Thursday which should bring temperatures closer to normal. Rain is expected to be minimal into mid week with the exception of light to moderate scattered rains in the NW, the Plains and from the Delta on to the east. Cooler weather continues to prevail in drought stricken areas of Russia, but scattered rains over the past several days have still left soil moisture levels short to very short across many growing areas. Rain in Germany continues to cause harvest problems and this is expected to reduce up to half of the wheat crop there to feed wheat quality. The Commitments of Traders report for the week ending August 24th showed selling by funds. Trend-following (managed) funds were net sellers of 17,927 contracts to reduce their net long position to 275,795 contracts. Index funds were net seller of 250 contracts for another small reduction in their near record large holdings. Tomorrow is First Notice Day for the September corn futures contract.

TODAY’S GUIDANCE: If we see a 100 million bushel increase in export demand due to tighter Black Sea feedgrain exports and a drop of yield of 3 bushels per acre from the last USDA forecast, ending stocks would slip under 1 billion bushels and stocks/usage to 7.2%, the second tightest on record. Spec buying on new highs on Friday and overnight have added to the strong buying demand from importers in recent weeks to keep the corn market in an uptrend. The December contract is nearing its January highs at 449 3/4, and traders indicate that further technical buying and stops may be waiting near that level to add to support. A push above that level would project a move to as high as 485 to 500 over the intermediate to longer term.  First support in the December contract is near 436 1/4 and then at 424 to 426. Next resistance is at 449 3/4.

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Commodity markets in general are showing a positive tilt overnight but sugar is not. The reversal from a six-month peak along with ideas that congestion is easing at Brazil ports helped to pressure. In addition, cooler and rainy weather is moving into the Russia and Ukraine producing areas which is seen as a negative development. October sugar closed lower on the session yesterday after trading at the highest level since March 1st. Trade remained choppy in New York while London played catch up with Tuesday’s late run in sugar. Traders await official monthly production updates from Brazil for release today but there is some expectations that dry weather in Brazil this harvest season could cause yields to begin to decline for the tail end of the crop and that there may be revisions lower from previous expectations. The International Sugar Organization sees a world production surplus of 3.22 million tonnes for the 2010/11 season as compared with a deficit of 4.95 million tonnes last year. Rains in Russia this week may not reverse losses expected after severe drought conditions in August but at least this may be seen as a reason to suspect that the production potential may at least stabilize. Traders had been expecting record sugar production of near 4 million tonnes before the drought but the Russia Sugar Producers Union has lowered their estimate to 3.2-3.3 million tonnes and some private forecasts have dipped as low as 2.8 million tonnes. India weather remains favorable for a large crop.

TODAY’S GUIDANCE: The reversal from six month highs may be seen as a negative technical development and some rains in Russia and talk of easing congestion in Brazil may be factor to encourage speculators to liquidate part of their large net long position. Resistance for October sugar comes in at 2016 with 19.28 and 18.94 as initial support.

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The market is in a steep downtrend and in a transition year with growing expectations that supply will be higher than demand for the coming year. However, the sharp losses of the past few weeks have left futures oversold technically and a turn back down in the US dollar overnight may help spark a corrective bounce. December cocoa continued to extend its decline yesterday with fairly sharp losses, reaching its lowest price levels since July of 2009. Widespread forecasts for a global surplus during the upcoming crop year are beginning to have a negative impact on the cocoa market, as this would be a change from the deficits of recent years. Recent rains in the Ivory Coast have improved the prospects for this season’s cocoa crop. A mild rebound in the British Pound was able to provide a small amount of support to the cocoa market. A wet and sometimes cooler pattern in the Ivory Coast in the forecast into next week is not what the crop needs to mature ahead of harvest in the fall. Sun and less rain will help the crop mature and will help the crop avoid black pod disease. For now, conditions look favorable to see a large Ivory Coast crop and this could help boost estimates for a world production surplus. Surplus estimates are seen near 75,000-100,000 tonnes for the coming year and these likely assume steady growth in demand. Given the historically high prices of the past year and a weakening European and US economy, demand may not be as high as expected. There were 22 deliveries posted against the September contract bringing total deliveries so far to 609. ICE cocoa warehouse stocks were down 21,210 bags to 3.567 million bags.

TODAY’S GUIDANCE: The downside break-out leaves 2682 and then 2495 as longer-term downside objectives. Selling resistance emerges at 2810 and 2829 for December Cocoa.

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The market saw a significant long liquidation break from Monday’s highs and fell as much as 12.3% in just three trading sessions. This leaves the market in an oversold technical condition but the follow-through selling certainty confirms that a major top is in place. Weakness in the US dollar and ideas that roasters may emerge to provide some support could spark a corrective bounce today. Open interest has been declining since mid-July as short-covering was the foundation for the last leg higher to 12 1/2 year highs and open interest declined sharply in the past few sessions which could be an indication that speculators are liquidating longs. The small and large trader combined net long position reached nearly 50,000 contracts in the last COT report which is considered overbought and a general sense that the world and US economies may weaken along with the recent uptrend in the US dollar has fund traders second guessing the “buy and hold” commodity play which has been a popular theme in recent months. December coffee was unable to recover from Tuesday’s huge losses, and extended the sell-off even further to the downside during the session yesterday. At this point, the market has moved over 18 cents lower in just three sessions. A 30% production increase over last year’s levels from a major coffee growing state in Colombia, in spite of disease outbreaks, had led some to lift overall projections for Colombia coffee production this season. Carryover coffee stocks in Vietnam for the upcoming crop year are expected to be larger than last season’s levels, in spite of heavy exports during July. Vietnam officials are still expected to move ahead on their stockpiling plan in which up to 500,000 tonnes (or near 50% of this season’s production) would be held off of the market for up to six months to support producer prices. The coffee market faces a significant (7-8 million bag) world production surplus this season which should help alleviate tightness in the cash market. ICE exchange stocks were down 5,867 bags yesterday to 2.022 million with 27,179 bags pending review.

TODAY’S GUIDANCE: Look for selling resistance to emerge near 174.20 and 176.90 for December coffee with 161.10 as next downside objective.

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The market signaled earlier this week that there were not enough sellers available to turn the trend lower. The question now becomes whether there are enough fresh buyers to take out the early August highs and resume the longer term uptrend. Over the short term, that may not be possible due to the overall negative tone in commodity and equity markets and some indications of an improved world supply situation ahead. But over the intermediate to longer term, a move to near 90.57 in the December contract is within reach based on continued export demand. An industry association in Australia, Cotton Australia, projected today that this year’s 2010/11 cotton crop will be up 70% from last year to 2.7 million bales with an official from that organization saying that a push over 3 million bales is possible. (It is now late winter in Australia.) In addition, India stands ready to more than compensate for lost production in neighboring Pakistan by sharply increasing its own cotton exports this year. The UN Foreign Agriculture Organization estimates that 3.2 million hectares of cropland were damaged in Pakistan during the recent flooding with the hardest hit crop likely to be rice. Cotton losses have still not been determined, but it seems likely that they will fall well short of the 2.0 million bales that some were projecting 1-2 weeks ago. Today’s Export Sales report will be a short term indicator of the urgency of world demand at current price levels. Traders are expecting sales to be at least 100,000 bales below last week’s strong total of 447,400 bales but sales are expected to remain well above the average of 168,000 bales that are needed each week to reach the USDA’s current export forecast for the 2010/11 crop marketing year. In yesterday’s action, December cotton took out the previous day’s high for the third day in a row. This came despite more weak economic news with new home sales falling to their lowest level since records have been kept and orders for durable goods rose by less than expected. Cooler and dry weather is expected in major growing areas of the south for the remainder of the week. In fact, below normal temperatures are expected in most of Texas, the Delta and the Deep South today with well below normal temperatures possible in the Texas Panhandle and northern Delta. Stocks registered for delivery against the ICE contract remained unchanged yesterday at 18,783 bales.

TODAY’S GUIDANCE: The market may key off export sales and the dollar into the end of the week. A strong total of 300,000 bales or more on today’s weekly report could push the December contract to a temporary new high. However, a total of 200-250,000 would tend to reinforce the status quo and a much weaker number might bring a test of the 83.50 level. First support in the December cotton contract remains near 84.09 to 84.14 with next support at 83.55. First resistance remains at 85.71.

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Big profits from the packer and the discount of futures to the cash market should help to provide some temporary support to the market, and the lower than expected slaughter pace for the past month along with suspicions that export demand remains strong are additional supportive forces. October hogs pushed sharply higher on the session yesterday, and held on to those gains to close strong. Cash hogs traded steady to $1.00 higher, as compared with trade expectations for steady to lower trade. This occurred late last week as well with traders looking for weak packer demand and lower cash on Thursday and Friday, but the cash trend and the pork cut-out value trend continues to support strong packer margins which leaves packers with the incentive to pay up in the cash market. Cash hogs are expected to trade steady to $0.50 lower for today. Packer demand has been stronger than expected. The spread between the pork cut-out and nearby futures is at the highest level since August of 2008, when China buying drove pork values to the previous record high before pork rallied to a new all-time high on Friday. The higher pork trade late Friday supported the early strong gains today. Pork cutout values released after the close yesterday came in at $97.79, up $2.30 from Friday and up from $91.19 the previous week. However, a later release of the cut-out from the USDA showed cut-out up 18 cents to $95.67. The adjustment down is still a record high, but the market remains nervous of a seasonal peak in pork values and a seasonal increase in production for the September to November timeframe. The CME Lean Hog Index as of August 19th came in at 83.78, up 1.01 from the previous session and up from 82.92 the week before. The estimated hog slaughter came in at 410,000 head yesterday. This was up from 407,000 head last week but down from 422,000 head a year ago as this time. Slaughter has been coming in below trade expectations for the past several weeks, and traders see part of the reason for the decline being due to too much heat in July and August which can slow weight gains. Pork production for the week was down 7.1% from last year, and this helped to support the market last week.

TODAY’S GUIDANCE: With a new high in pork cut-out, new sellers might be tough to find and short traders are vulnerable to covering. Look for support for October hogs at 77.47 and 76.70, with 78.75 and 79.30 as good resistance.