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: 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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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: 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: The wheat market continues to find support from lower production forecasts outside the US along with a burst of import buying to start the week. Traders said that this helped wheat to post a modest gain overnight in the face of substantial selling in corn and a lower soybean market. This left the December contract near last week’s highs with the wheat/corn spread also near its recent highs in the December contracts. India posted a slight reduction in its 2009 wheat crop to 80.71 million tonnes versus a previous estimate of 80.98 million. While this is a minor reduction, it is the latest in a long list of countries that have reduced crop estimates in wheat, and one analyst notes that traders are nervous that the trend will continue. Iraq bought 350,000 tonnes of wheat from various origins including Russia, Canada, Romania and the US. A private buyer in Israel is tendering to buy 24,000 tonnes of feed wheat. Very hot weather in the US hard red winter wheat belt may have brought some last minute stress to that crop prior to harvest, but traders do not expect this to be a major issue. The hottest temperatures have been in the western portion of the central and south central Plains. So far, they have remained south of major spring wheat areas and this is expected to continue this week with temperatures in that region staying mainly in the 80s. Growing areas in Canada to the north remain cooler with excess soil moisture and cool temperatures thought to be adding to the risk of disease there. Sources indicate that warmer temperatures are needed, but they are not expected this week, at least not on a sustained basis. Some increase is possible later in the week, but the big surge of very hot air that is expected on Friday is expected to push to the east, into the north central Midwest, missing the Canadian Prairies. Forecasters then call for cool air to push south into the weekend which would further reduce temperatures on the Canadian Prairies. The Commitments of Traders report for the week ending July 13th showed more net buying by funds. Trend-followers were net buyers of 17,124 contracts to reduce their net short position to 36,592. This is less than half the size of their net short position in wheat just a few weeks ago. These traders were also large net buyers of 16,032 contracts in KC wheat. Index funds were net buyers of 2,377 contracts.

TODAY’S GUIDANCE: Wheat shows no sign of pausing as fund buying, export demand and the improved competitive position of US wheat on the world market all provide support. Of course, the main factor in wheat is crop weather which could bring further downward revisions in Canada and Russia. First support in the December contract remains at 5.96 1/2 and then at 5.88 1/4. Next resistance is at 6.35 to 6.40.

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NEAR-TERM MARKET FUNDAMENTALS: Wheat started the week with a sharp overnight advance in the December contract. KC wheat was also sharply higher, with Minneapolis trailing by a narrow margin. Traders said that short covering by funds and other specs may be the key to recent gains with background fundamental support coming from lost acreage in Canada, a weaker US dollar and a damaging heat wave in Europe. Rains over the weekend provided some relief in Europe, but some analysts indicated that the rains may have been too scattered to provide general relief. The Commitments of Traders report for the week ending June 29th showed mixed activity by funds. Trend-following funds were net buyers of 4,358 contracts to trim their very large net short position to 62,540. Index funds were net sellers of 4,910 contracts. Non-Commercial and Non-reportable combined traders held a net short position of 63,417 contracts. This represents a decrease of 47 contracts in the net short position held by these traders. The winter wheat harvest has benefited from recent dry weather in most of the Midwest, and it is now well advanced into the northern hard red winter wheat belt. The USDA will release its latest weekly Crop Progress report this afternoon, one day late due to the Independence Day holiday. Scattered and mostly light rains are expected in the central Plains into mid week with somewhat heavier amounts in the northern Plains by tomorrow. Much heavier rain is expected on the Plains and into the SW Midwest by Thursday, but this is expected to fall mainly in areas that have already been harvested for both hard and soft red winter wheat. The Ministry of Agriculture in Russia lowered its grain estimate for this year to 85 million tonnes from a previous estimate of 88-90 million. This is due to drought, especially in the southern Urals.

TODAY’S GUIDANCE: The market continues to be led by Europe, but traders note that wet conditions in Canada may generate increased incidence of disease in the crop there. Harvest in the US is entering its final stages for winter wheat and that typically takes some of the pressure off wheat prices. Short-covering by increasingly nervous trend-following funds should provide the fuel for a continued rally. First support in the December contract is near 520 with next support at 507. First resistance is near 553.

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NEAR-TERM MARKET FUNDAMENTALS: December wheat remained in this week’s narrow trading range yesterday and again overnight. Traders indicate that pressure from the advancing harvest and favorable hard red winter wheat yields in the US is being balanced by the expected downturn in Canadian production along with quality concerns for US soft red winter wheat and markedly improved demand on the export market in recent weeks. The US hard red winter wheat harvest is coming to an end in Oklahoma and it could be close to wrapping up in parts of Kansas by the end of next week. Export sales for wheat were strong again yesterday at 720,600 tonnes. This was well above the high end of trade expectations, and it marks the second week in a row of surprisingly strong US wheat sales. The biggest sale on the report was for 244,500 tonnes to an unknown destination. Sales need to average 374,000 tonnes each week to reach the USDA forecast. The International Grains Council raised its 2010/11 world wheat crop by 4 million tonnes to 664 million despite an expected downturn in Canadian production. They expect usage to increase by 4 million tonnes to stepped up feed wheat usage. Drier harvest weather is expected in many harvest areas into next week with the exception of scattered and mostly light showers in the Midwest this weekend. Traders report that an Israeli firm bought about 60,000 of Black Sea origin feed wheat. Tunisia bought 50,000 tonnes of wheat from a previously announced tender. This continues the recent trend toward stepped up demand for wheat from the Middle East and North Africa.

TODAY’S GUIDANCE: Improved demand and potential short covering by trend-following funds is supporting the wheat market for now. It may take a strong move one way or the other in the dollar to break the price deadlock. While the longer term outlook is still negative, the December contract could rally to near its 100-day moving average over the shorter term. That average sits at just over 530 this morning. First resistance remains at 517 1/4 in the December contract with further resistance near 526 to 527 1/2. First support remains near 491 1/2 in December with next support at 480.

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NEAR-TERM MARKET FUNDAMENTALS: The wheat market continued to hold its recent gains overnight despite a modest rally in the dollar. This comes as traders are paying more attention to recent wetness in the south central Plains and in the southern Midwest. However, the forecast through Saturday calls for scattered light showers in most of the hard red winter wheat belt which should help the drying process in Oklahoma and Kansas. Continued heavier rains are expected in the southern Canadian Plains into Friday. A small system of moderate to heavier rains could move across parts of Iowa, northern Illinois and Indiana and on into parts of Ohio on Saturday and Sunday. Argentina’s agriculture minister said yesterday that recent rains in wheat producing areas there could increase wheat production to as high as 15 million tonnes. An increase of 1 million hectares in the area planted to wheat is also expected to also boost production. The USDA currently projects the 2010/11 Argentine wheat crop at 12.0 million tonnes, up from 9.6 million tonnes in 2009/10. The planting season in Argentina is well advanced and it typically ends in mid July. Saudi Arabia’s water and electricity minister said yesterday that wheat producers are moving more rapidly than anticipated away from water-intensive crops there. The country had originally announced a plan in 2008 to phase out wheat production altogether by 2016. Bulgaria’s agriculture minister says that good weather should allow this year’s wheat crop to match the 4.0 million tonnes produced last year, despite a drop in planted area. This should allow the country to export 1.5 million tonnes according to the minister. Growing conditions in the Former Soviet Union continue to be mostly favorable, although conditions are somewhat dry in the Urals region of Russia. A lower dollar and delays in the US winter wheat harvest were considered supportive forces to the market yesterday. Traders also noted that buyers are reluctant to step into the wheat market after the recent 2-week slide into new contract lows. The USDA announced a sale of 128,080 tonnes of wheat to an unknown destination yesterday morning.

TODAY’S GUIDANCE: Harvest delays in the US and lost planted acreage in Canada have halted the decline in futures for now, but it may take consistent short covering by trend-following funds to bring substantial further gains in price. A burst of buying by importers would help, but supplies are still ample and the favorable outlook in Argentina may help to keep buyers on the sidelines unless we see a sharp and prolonged break in the dollar. First support is near 480 in December with next support at 472 1/4. First resistance is at 507.

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A bumper grain harvest is making its way to market. Terry Roggensack, founding principal, The Hightower Report tells BNN the road ahead may be rocky.

http://watch.bnn.ca/market-morning/june-2010/market-morning-june-8-2010/#clip311022

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NEAR-TERM MARKET FUNDAMENTALS: The wheat market continued to push into new contract lows on Friday and again overnight on strength in the dollar and weakness in many commodity and equity markets. However, losses in wheat were less extreme than in corn over this stretch. Selling is being tied to continued strength in the dollar after last week’s disappointing economic numbers as well as amply supplies on the world market, although large spec traders are already heavily short in wheat. India announced that its wheat stocks soared to 35.2 million tonnes as of June 1st according to government sources. This compares to their target level of just 4 million tonnes. Rice stocks were also large at 25.3 million tonnes versus the target of 12.2 million. This comes as monsoon rains are moving into the region. Normal monsoons are expected and this would increase yield over last year when monsoon rains were at the lowest levels in decades. The Commitments of Traders report for the week ending June 1st showed moderate net selling by funds. Trend-followers were net sellers of 4,654 contracts to increase their big net short position to 67,865 contracts. Index funds were net sellers of 4,538 contracts in wheat. Hot weather continues to push from the SW and is expected to move up from Texas farther into the central Plains and SW Midwest today. This is triggering moderate to locally heavier rains in Kansas today with somewhat heavier amounts expected in central and especially in eastern Nebraska by tomorrow. This heavy rain system is expected to extend through Iowa, northern Missouri and much of Illinois and Indiana before diminishing somewhat into Ohio. None of this rain is welcome for the late developing winter wheat crop. Weekly export sales came in at a very disappointing at minus 53,200 metric tonnes for the current marketing year and a more favorable 294,300 for the next marketing year for a total of 241,100. As of May 27th, cumulative new crop wheat sales stand at 12.5% of the USDA forecast for the upcoming 2010/2011 marketing year versus a 5 year average of 14.6%. New crop sales need to average 405,000 tonnes each week to reach the USDA forecast. Bangladesh is tendering for 100,000 tonnes of wheat to boost its emergency food stocks.

TODAY’S GUIDANCE: The USDA will issue its June Crop Report and Supply and Demand reports this week and this will include a formal survey estimate for winter wheat. Some analysts are looking for a bump upward in yields since the May yield was below last year, even though the weekly conditions reports are far better than they were at this point last year. The market is breaking on a stronger dollar. We could see a bounce if the dollar eases. Barring a break in the dollar, look for erosion to continue. Next support is at 426 1/4. First resistance is at 460 1/2 and then at then at 479 for July wheat.