The Hightower Report

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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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NEAR-TERM MARKET FUNDAMENTALS: December corn continued to retreat from last week’s highs during the overnight session following a weekly Crop Progress report that left the good-to-excellent rating for the US corn crop unchanged from last week at 71%. This compares to 68% last year at this time and a 10-year average of 61% good-to-excellent. Ninety-seven percent of the crop reached the silking stage as of Sunday versus a 5-year average of 94%, with 52% of the crop in the dough stage and 14% of in the dent stage. The fact that this year’s crop remains ahead of the average pace of development in all categories greatly lessens the threat from and early frost according to one analyst, although he noted that a serious early frost last year caused little loss of yield despite the fact that the crop was very late. Traders said that a higher dollar is also contributing to weakness, as is evening up ahead of Thursday’s Crop Production and supply and demand reports. Analysts’ yield estimates are near unchanged from the USDA’s July yield forecast of 163.5 bushels per acre. Weather forecasts remain hot for most growing areas for the remainder of the week. Temperatures into tomorrow are expected to be in the mid to upper 90s in the middle and southern tiers of the Corn Belt with the low 90s expected in most of Iowa, northern Illinois and northern Indiana. Hotter temperatures are expected to the west and SW with Nebraska in the mid to upper 90s and the southern Plains and parts of Arkansas and Louisiana hitting the 100s today and tomorrow and possibly longer. This week’s export inspections for corn were 41.986 million bushels, up from 33.998 million last week. Inspections need to average 57.287 million bushels each week to reach the USDA’s current export projection for 2009/10. Traders continue to watch the world wheat and feed trade as those markets adjust to the aftereffects of the Russian drought. Vladimir Putin said yesterday that there is no certainty that the ban on grain exports will end on December 31st as the drought in Russia continues with no significant rain in sight. The largest feed maker in South Korea is in the market for up to 165,000 tonnes of corn today for delivery in November-December.

TODAY’S GUIDANCE: Look for erosion to continue in corn despite some stepped up demand due to the loss of feed wheat from the Black Sea region. The US crop is in better than average shape, funds are sitting on large long positions in corn and export shipments are lagging the pace needed to reach the USDA’s export projection for 2009/10. If the USDA raises its yield forecast by 1 bushel or more on Thursday, supplies will look to be adequate over the intermediate term. If yields are lowered, stocks will be viewed as tight. The margin for turning the market higher or lower is exceptionally narrow this year. The market could see a disappointing report this week (exports up only 50 million bushels and yield near 164-165) but in the end we see a lower yield and a jump of near 200-250 million bushels in exports as bullish factors to tighten the supply. First support in the December contract is near 407 and then near 396 1/2 to 400. First resistance is at 424 1/2 and 427 3/4.

TODAY’S MARKET IDEAS: The dollar and unchanged quality ratings may help push December corn down to support at 407 and then 399 3/4. Look for down until after the report and the break is likely a buying opportunity.

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NEAR-TERM MARKET FUNDAMENTALS: Wheat continued to slide overnight as the dollar continued its modest recovery from last Friday’s new low for the move. However, the December wheat contract did manage to hold above yesterday’s lows overnight. The world wheat and feed markets continue to adjust to the ongoing Russian drought. Forecasts indicate that there is no significant rain in sight in affected areas which is expected to bring continued losses in spring grain crops. The Russian government said yesterday that it would honor existing export contracts, although it is not certain whether this applies only up to the start of the ban on August 15th. The state grain exporter, United Grain Company, said that it intends to honor all contracts before the ban sets in, but some shippers have said that there is not enough grain in position to fulfill all contracts in that short time span. Others note that export capacity at major loading points may also fall short of the amount needed to honor all existing contracts. Sources indicate that 300,000 tonnes are currently in exportable positions near Black Sea ports while another 300,000 tonnes are en route to those ports. Adding to the difficulties in Russia is the growing realization that soil in most winter wheat areas is far too dry to plant next year’s crop. There is still time for a shift in weather to bring enough rain for a favorable planting season, but one analyst indicated that this would require a complete reversal of current weather patterns. He added that if the winter crop is sharply curtailed this year, the ban on exports would likely be extended well into 2011. Prime Minister Putin said yesterday that there was no guarantee that Russia’s current ban on exports would not be extended past the December 31st end point. He said that the government had to assess losses which could drop the overall grain crop to as low as 60 million tonnes from the latest estimate of 65 million by the Agriculture Ministry. Traders in Ukraine report that a lack of availability of rail cars along with extra customs checks for grain is giving the appearance that Ukraine is undertaking a slowdown in grain exports. Bulgaria upped its estimate of its 2010/11 wheat crop yesterday to 3.6 to 3.7 million tonnes today. A recent estimate had put the crop at 3.5 million tonnes versus 4.0 million last year. In addition, Jordan announced today that its wheat purchases are the equivalent of 6 months of usage. This follows last week’s announcement by Egypt that it has six months of usage already on hand. This week’s (US) export inspections for wheat were 14.248 million bushels, down from 22.991 million last week. Inspections need to average 19.522 million each week to reach the USDA’s export forecast for the 2010/11 crop marketing year. The US Spring Wheat Harvest is 20% complete compared to 5% last week and 7% last year. The 10 year average for this time of year is 25%. The weekly Spring Wheat Conditions report showed 82% was rated good/excellent compared to 82% last week and 72% last year. The 10 year average for this time of year is 59%. The weekly Winter Wheat Harvest report showed 87% complete compared to 83% last week and 89% last year. The 10 year average for this time of year is 93%.

TODAY’S GUIDANCE: More import demand needs to be covered to compensate for lost Black Sea supplies and the realization that Russia’s winter wheat sowing could be sharply curtailed if there is no rain, might be enough to generate some support but it will take time for this to develop. For now, the focus is on big crops in the US and a slowdown in near-term demand due to recent high price.

TODAY’S MARKET IDEAS: Selling resistance for December wheat is at 773 1/2 and 791 1/2 with 721 1/2 and 675 3/4 as next support.

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NEAR-TERM MARKET FUNDAMENTALS: After falling short of last week’s highs yesterday, November soybeans moved lower overnight. Traders said that a modest recovery in the dollar yesterday and follow through strength in the dollar overnight contributed to the stall in the rally in soybeans. Other contributing factors were said to be evening up ahead of Thursday’s big Crop Production report from the USDA along with a lower wheat market and an unchanged quality rating for the US soybean crop this week. The USDA’s Crop Progress report showed the good-to-excellent rating for soybeans at 66% as of Sunday, unchanged from last week and also unchanged from last year. The 10 year average good-to-excellent rating for this time of year is 59%. China’s soybean imports slowed in July to 4.95 million tonnes, down from the record import total in June of 6.2 million tonnes. However, despite the drop the July total is still the second largest monthly import total on record. Weather remains very hot in most soybean growing areas of the US, and this is expected to continue for the remainder of the week. Mid to upper 90s are expected in the central and southern tiers of the Midwest with low 90s expected in Most of Iowa, northern Illinois and northern Indiana. Temperatures are expected to be in the upper 90s in the Delta with 100 degree readings in northern Louisiana and southern Arkansas. The North China Plain needs rain and cooler temperatures would be welcome. Rain would also be welcome in central and western portions of the NE soybeans belt in China. August soybeans finished substantially lower yesterday, despite the fact that deliveries remain at zero for soybeans. The USDA announced a sale of 284,000 tonnes of soybeans to China yesterday for delivery during the 2010/11 crop marketing year. This week’s export inspections for soybeans were 7.131 million bushels, down from 10.659 million last week.

TODAY’S GUIDANCE: With weakness in other grains and outside markets today and the potential for negative news for Thursday’s reports, November soybeans could retreat to support back at 1015 or even 1005 over the near-term with 1029 1/2 as stiff resistance today. December meal support is back at 286.20. Soybean oil made new highs for the move yesterday and then retreated along with the rest of the soybean complex. Oil looks to remain the leader over the short term as soybeans and meal see liquidation pressure ahead of Thursday’s reports from the USDA. A lack of damage from the ongoing heat wave last week may divert attention back to the big South American supplies and next year’s projected jump in US ending stocks. However, if the USDA lowers China’s 2010/11 soybean production estimate on Thursday, or if this week’s heat is believed to be damaging the US soybean crop, this could be enough to generate renewed buying.

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The devastating drought which still has no sign of abating in the Black Sea region has been the primary bullish factor supporting the surge in wheat prices in the past month. December wheat put in a low of $4.85 per bushel on June 30th and posted a high of $8.68 on Friday, August 6th, a gain of 79% in just 27 trading sessions. End users were forced to make a sudden adjustment from an oversold and down-trending market with growing surpluses to the sudden loss of tens of millions of tonnes of supply from Russia, Kazakhstan, Ukraine, Canada, Germany, France, Hungary, Bulgaria, Morocco and elsewhere. We believe the rally into the August 6th peak may be just an “adjustment” spike and that the market will soon return to more of a trading range back down to the 625-725 zone basis December wheat.

The wheat market is making a shift from weather-related production losses to a scramble by major importers to book sales before prices move even higher. Many importers such as Egypt will need to diversify their supply sources. Egypt is the world’s largest wheat importer, and they have become almost completely dependent on Russia over the past year due to lower shipping costs from that region. Now they must get more of their wheat from France and Germany and even from the US and Australia. Record high temperatures in Russian grain areas for the past few weeks (105-110 degrees) with a lack of rain helped drive the market higher. End users, fund traders and producers were caught out of position and the adjustment has been fast and furious.

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NEAR-TERM MARKET FUNDAMENTALS: The set-back in wheat futures overnight helped to pressure the market as traders see wheat as the leader in the short-term. November soybeans jumped as much as 64 1/2 cents in just four trading sessions as some threatening weather for the crops in the south and a surge in wheat futures have helped support active fund buying. Talk of the overbought condition of the market and weather uncertainty were seen as limiting forces on the rally yesterday. The USDA reported a sale of 116,000 tonnes of soybeans for China (new crop) and 130,000 tonnes of US soybeans for unknown destination. Strong export demand has helped provide underlying support. The weekly crop conditions report showed that 66% of the soybean crop was rated good/excellent compared to 67% last week and 67% last year. The 10 year average for this time of year is 60%. Soybeans setting pods reached 53% as compared with 33% last year and 48% as the 5-year average. Crop progress this week depends on the location. Weather for Iowa, the northern half of Illinois and areas to the north look to get hit with “ring of fire” thunderstorms and temperatures in the 80′s and low 90′s. The hot and wet set-up looks favorable for crops in this region. However, rainfall looks low for the southern crops and temperatures are very high so crops in Arkansas, Missouri and the delta look to come under some stress. Tbis could lower yield potential for crops in the severe heat. St Louis looks over 100 today and Hutchison Kansas was a record high 109 yesterday. November soybeans closed slightly higher on the session yesterday but 19 1/2 cents from the early highs. Funds were active buyers early to support the market, but long liquidation selling emerged on the early rally and there was a lack of much commercial buying interest as the market drifted lower for much of the session. Talk of rain in Iowa yesterday and rain in the forecast for the delta for later this week helped to pressure the market off of the highs as hot and wet weather is seen as mixed to generally positive for the developing crop. Traders said that a sharply higher crude oil market along with ideas that China’s economic growth could accelerate were supportive to soy oil. This may be particularly supportive to oil since China remains in a trade war with Argentina that is switching soybean oil export business to the US. This week’s export inspections for soybeans were 5.9 million bushels, down from 7.1 million last week. Total inspections to-date stand at 95.6% of the USDA’s projection for 2009/10 versus the 5-year average of 93.9%. Inspections need to average 13.2 million bushels each week to reach the USDA’s projection.

TODAY’S GUIDANCE: Weakness in the face of another new low for the US dollar and strength in energy market suggests the market is in an overbought condition. The weather outlook is mixed to supportive for the short-term but the eastern Corn Belt looks cooler for the 6-10 day outlook. The southern mid-west/delta region weather is threatening to yield but some scattered rains could hit the region later this week. The psychology is turning more supportive but the market is overbought short-term.

TODAY’S MARKET IDEAS: The upside break-out left 1025 1/4 as upside objective for November soybeans and this target was hit before the weak close yesterday. Look for resistance today at the 1009 3/4 to 1013 1/2 zone with support back at 987 and 974. The reversal in December meal leaves 283.80 as short-term target. December soyoil buying support is 40.44 with 42.57 as next target.

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NEAR-TERM MARKET FUNDAMENTALS: Severe drought conditions are expected to persist in Russia this week, although recent rains in western Kazakhstan have trimmed the overall drought area somewhat in the Former Soviet Union. Ukraine is also experiencing continuous rains in some areas which are slowing harvest there. Ukraine’s agricultural ministry pegs its grain harvest as of July 30th at 24.19 million tonnes which compares to 26.5 million last year. Ukraine’s wheat harvest to date stands at 15 million tonnes, down from 16.5 million last year. Hungary, which has also received unwelcome rains this year, pegged its wheat harvest at 3.5 million tonnes for 2010/11 today, down 20% from last year. This is in line with previous estimates. Black Sea area traders report delays in shipments of wheat bound for the Far East, but they indicate that there have been no drought-related defaults on sales thus far. India’s farm minister reported yesterday that the country will not impose an import duty on wheat. India was a small importer of wheat over the past year and it currently holds a large strategic surplus of wheat and other grains. Temperatures in the US spring wheat belt remain warm with similar conditions continuing to spill over into the Canadian Prairie. This is considered beneficial. This week’s Crop Progress report showed the US spring wheat harvest at 5% complete. Harvest stood at 3% last year and the 10-year average is 11%. The spring wheat crop is rated at 82% good/excellent compared to 83% last week and 71% last year. The 10 year average for this time of year is 57%. The US winter wheat harvest is 83% complete compared to 79% last week and 83% last year. The 10 year average for this time of year is 89%. December wheat closed higher for the 5th session in a row yesterday. The market has rallied as much as $2.57 per bushels since the June 30th lows. Basis levels were weak due to the strong rally in futures yesterday and traders indicated an increase in selling of all grains by producers on the rally. Egypt bought 180,000 tonnes of Russian wheat yesterday, despite the drought, with traders indicating that no US wheat was offered on this tender. This week’s export inspections for wheat were 22.04 million bushels, up from last week’s 15.9 million. Inspections need to average 19.4 million each week to reach the USDA’s projection.

TODAY’S GUIDANCE: The wheat story and the drought in Russia were headline news yesterday, and that may be the best indicator that the rally has reached a short term peak. Producer selling and adequate world supplies indicate that the market simply needs to shift export buying patterns and accommodate some further short covering in futures by trend-following funds. This may stall the rally at near yesterday’s highs in the December contract for the next several days, although the lower dollar could bring a surge in export demand. First support in the December contract is at 6.89 to 6.93 3/4 and then near 6.60. Resistance is at 7.42.

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NEAR-TERM MARKET FUNDAMENTALS: December corn rallied past its July highs to its highest level since January 13th yesterday, but retreated to close lower on the day. Traders said that a surge in wheat, crude oil and equities contributed to yesterday’s buying enthusiasm in corn. However, one trader noted that a lack of demand in nearby cash markets and selling by funds in futures after the early rally were factors that contributed to the late sell off. More rain is tracking in from the far western Corn Belt through Iowa and into northern Illinois this morning. Most of this rain is unwelcome as many fields in the affected areas are at or near saturation levels. Today’s forecasts call for moderate temperatures in the western and NW Corn Belt and on east through northern Illinois and northern Indiana. Temperatures south of this area are forecast in the 90s with 100 degree plus levels expected in Arkansas, Louisiana, Western Tennessee, in the area near St. Louis and in much of Mississippi. The 100-degree air mass is expected to shift slightly to the east and north tomorrow as it remains pressed between the cool air system in the northern Midwest and unstable tropical air in the Gulf. This week’s Crop Progress report from the USDA pegged the good-to-excellent rating for the US corn crop at 71%, down from 72% last week. This compares to 68% last year and a 10-year average of 62%. Some traders are already looking for further deterioration next week due to excessive rains in the western Corn Belt and excessive heat in the central and southern Corn Belt this week. Silking stands at 93% as of Sunday compared to a 5-year average of 86%. This week’s export inspections for corn were 31.5 million bushels, down from 42.8 last week. Inspections need to average 54.6 million each week to reach the USDA’s export projection for the 2009/10 marketing year. Traders indicate that Japan has booked less than half of its corn import needs for the 4th Quarter, leaving over 2 1/2 million tonnes still to be booked. The USDA agricultural attache in South Africa expect this year’s corn crop to increase by 10.7% to 13.9 million tonnes. South African exports are pegged at 2.5 million tonnes in 2010/11. The USDA announced a sale of 232,000 tonnes of corn for unknown destination.

TODAY’S GUIDANCE: A number of commodity markets saw reversal type action yesterday and this may keep the pressure on in corn despite a weakening dollar. Shippers and importers show no signs of accelerating the pace of corn shipments over the short term and US weather is still favorable enough to generate a trend line yield near 163.5 bushels per acre. Still, the trend is turning higher in a number of markets and lower prices in corn should bring an increased pace of bookings by importers such as Japan and possibly China. First support in the December contract is at 395 to 396 1/4 and then near 390. Resistance is at 410 and 418.

TODAY’S MARKET IDEAS: Buy December corn on a dip to the 397-392 zone with 423 as next objective.