The Hightower Report

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NEAR-TERM MARKET FUNDAMENTALS: Trade reaction to the State of the Union address was somewhat positive for financial markets, and grain traders saw some relief from the bearish outside market forces overnight. However, there is still significant concern that the bank regulation reforms could in the long run spark increased volatility in the futures markets. Ideas that the market is in a short-term oversold condition and that reforms will not occur for months or longer have helped to provide some support. There are unverified rumors that China has switched two cargoes of US soybeans to South American origin and that there is one US cargo of soybeans under quarantine in China for quality concerns. On top of fears that bank trading restrictions could lead to futures volatility, China traders are concerned that the tightening credit situation there could lead to a near term slowdown in commodity demand and at least temporary pressure on many commodity markets. A strong US dollar, a weak Brazilian currency and talk of hedge funds shifting from a net long to a net short position in soybeans are factors which have helped to pressure the market. Argentina crushed 1.5 million tonnes of soybeans in December, compared with 2.26 million tonnes in November and 2.37 million in December 2008. March soybeans fell to their lowest level since October 8th yesterday with good volume noted. Growing conditions continue to be very favorable in Brazil with forecasts calling for an improvement over current hot and dry conditions in Argentina by the end of next week. Brazil is expecting scattered rains over the next several days, while Argentina may start getting scattered rains on Saturday and again to start next week. Indications of cooler and wetter weather in Argentina for later next week could ease stress concerns. The Census Bureau will issue its latest monthly crush data this morning. Traders are looking for the crush rate to be nearly 173 million bushels for December. Export sales will also be released this morning with expectations currently ranging up to 900,000 tonnes for soybeans, up to 300,000 tonnes for meal and 5,000 to 20,000 tonnes in soy oil. The outlook for surging soybean stocks for the coming year as record crops from the US, Brazil and Argentina move in to saturate demand has helped shift the psychology in the soybean complex.

TODAY’S GUIDANCE: Eventually, the market looks to end up with too much meal and a tightening supply of world vegetable oils. The market is in a short-term oversold condition, but rallies still look like selling opportunities. Selling resistance for May soybeans comes in at the 949 3/4 and 960 3/4 with 932 3/4 and 904 1/2 as next downside objectives. November soybean selling resistance is at 936 3/4 with 909 1/4 as next downside objective.

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NEAR-TERM MARKET FUNDAMENTALS: Strong demand from crushers and a weak US dollar were seen as the primary reasons that fund traders turned more aggressive buyers yesterday. The market continues to see a clash of short-term supportive demand fundamentals with the longer-term outlook (beginning February or March) for a surge higher in world production and increasing world soybean supply. Good weather in South America is seen as a negative force but demand continues to come in stronger than expected for US soybeans. The NOPA pegged the US November crush at record 160.3 million bushels versus expectations of near 156 million. This was up from 155.3 million bushels in October and up sharply from last year’s recession-reduced total of just 139.4 million bushels. Soy oil stocks as of the end of the month stood at 2.411 billion pounds, up from 2.286 billion last month. Ideas that there may be continued support from index fund buyers into early next year was seen as a supportive force. Funds were active buyers on the session for soybeans and meal and cash markets were steady with strong export and crush demand able to absorb the flow of farmer selling. Oil saw some selling pressure from China announcement that it would release rapeseed and soy oil into its domestic market in order to maintain supplies and keep prices stabilized. There was also willingness to release soybeans from reserves to help ease prices. Moisture levels have improved in Argentina recently with up to 1 inch of additional rain expected later in the week and into the start of the weekend in major growing areas seen as a factor to see improving conditions. Southern Brazil areas look to see periods of dryness into Friday which should allow for some increased harvest activity and allow wet planted areas to dry out which is seen as beneficial. An EPA spokeswoman indicated yesterday that the agency will issue final rules on revisions to the renewable fuel standards in early January.

TODAY’S GUIDANCE: We continue to believe that there is enough supply on the horizon to be able to turn the short-term trend down in soybeans but fund buyers continue to emerge on days of new China demand or on days of a weak US dollar. Perhaps the clear and decisive turn up in the dollar overnight will be seen as a negative force. March soybean resistance comes in at 1062 3/4 and a close above this level would suggest a continuation of the uptrend with 1105 as next upside target. However, a move back under 1056 and especially 1049 1/2 might be seen as bearish signals. For now, keep 1019 3/4 and 1004 3/4 as next downside targets.

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NEAR-TERM MARKET FUNDAMENTALS: Without help from outside markets, soybeans came under pressure overnight as the market resorted back to the outlook for good harvest weather this week and bearish news from the USDA this week which attracted new selling. Funds have been active buyers of soybeans and commodity markets in general recently with a declining US dollar and a very easy-money policy by the Fed helping to attract new investors. Solid gains in the US dollar appear to have turned the psychology more negative for those commodity markets which do not seem to have the fundamentals to move higher. For soybeans, the outlook for US ending stocks to increase by 95% to 270 million bushels and world soybean ending stocks to increase by 35% to 57.39 million tonnes has soured the price outlook. In addition, traders are not ruling out an even higher yield and higher production for the US as harvest weather has turned from near disastrous to near ideal. The USDA also reported record high production forecasts for Brazil and Argentina for the coming season for the crops which are just being put in the ground. There are still concerns with the dry pattern for key growing areas of Argentina but at this early stage, traders seem to be taking a wait-and-see attitude regarding the slow planting pace with planting progress near 33.8% complete as compared with 40.8% as normal. Argentina is expected to see some rain early next week although this could miss the very dry southern soybean belt there. Dry weather is expected in all areas until then which will increase the need for moisture, especially in the western and southern growing areas. Traders believe China buyers will slow down on purchases in the coming weeks, according to a survey of buyers from the China National Grain and Oils Information Center. China has already booked near 15 million tonnes of US soybeans and there is talk that they are booked through January. October soybean imports from China reached just 2.52 million tonnes which was down for the 4th month in a row and compares with peak of 4.7 million tonnes in June. Funds were noted as active buyers yesterday but there is a growing concern that funds could turn sellers if we go through a period of steady or higher trade in the US dollar. The latest weather forecasts call for increased rain in the Midwest from late in the weekend into early next week. The weather models overnight seem to be even wetter for early next week. Dry weather into the weekend should keep harvest active. Gulf basis was firm yesterday. The overnight deliveries against the November soybean futures contract were 222 contracts. Friday will be the last trading day for November soybean futures.

TODAY’S GUIDANCE: The market appears poised to push sharply lower “if” the fund buying spree slows and the focus shifts back to the soybean market fundamentals. A series of lower highs off of the October 23rd highs leaves the technical set-up a bit negative as well and a short period of a higher or even steady US dollar could spark aggressive selling from funds.

TODAY’S MARKET IDEAS: March soybean selling resistance comes in at 979 with 967 1/2 and 941 1/4 as next objectives. Use 905 1/2 as next downside target. January soybeans look set to test key support at 940 1/2 with 971 1/2 as close-in resistance. March Meal selling resistance is at 285.40 with 267.40 as next swing target.

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NEAR-TERM MARKET FUNDAMENTALS: Yesterday brought another round of substantial gains in the soybean complex with support coming from fund buying as it did on Monday. Traders also cited a sharply higher gold market and forecasts of moderate rains in some harvest areas in the Midwest early next week as a source of support. Heavier amounts of rain are expected in much of the Delta and parts of the mid south next week, but these rains are not expected to be as widespread or heavy as previous rains in that region. Some forecasts indicate that this next mini-wave of rain will be followed by another dry spell in virtually all harvest areas through the end of next week. This could allow soybean harvesting to get closer to completion by the end of next week. Weather remains mostly favorable in Brazil with planting progress said to be well above normal. Planting is most advanced in Mato Grosso with recent rains slowing the pace somewhat in parts of southern Brazil. Argentina is generally drier than in neighboring Brazil, but recent rains have improved planting conditions. Brazil’s trade ministry reports that October 2009 soybean exports were 722,700 tonnes, down sharply from 1.830 million tonnes in September and also down from 1.061 million tonnes in October, 2008. Brazilian meal exports were also down versus September and last year while oil exports posted a small gain versus September. Deliveries against the November soybean futures contract were 220 contracts this morning. These were the first deliveries that have been made so far against the November contract.

TODAY’S GUIDANCE: Yesterday, the soybean complex and grain markets signaled that Monday’s late rally was not a fluke. Funds were buyers again and soybeans pushed well above Monday’s highs. This suggests that last week’s setback was merely a correction and that the intermediate term trend is higher. Bull spreads continue to gradually work higher as a result of the big window of demand for US soybeans and products prior to the harvest of South American crops next spring. This was illustrated in the big export inspection number on Monday which tells us that the time has come to ship the soybeans that China and others have been buying at an aggressive pace for the past several months. Add the surge of fund buying to the mix and this could carry the January contract to as high as 1107 by early 2010. A series of support levels fall in at 996, then 983 to 985 and then at 968 1/4. First resistance is at 1029 1/4 and then near 1049.

Below is a sample of our Daily Commentary. To get this comment, and our daily coverage of 15 additional markets and trade ideas, visit futures-research.com for your free 2 week trial!

NEAR-TERM MARKET FUNDAMENTALS: The soybean complex saw a mixed performance on Friday with soybeans and meal giving back some early gains, but closing higher. Wet weather late last week and into Saturday matched expectations. Forecasts call for heavy rains in the western Delta today with that rain pushing east and north into the mid south and Deep South by tomorrow. A band of mostly light rains is expected from East Texas up through southern Wisconsin with areas to the east and west of this band staying mostly dry. The Commitments of Traders Report for the week ending October 20th showed net buying by funds as expected on the recent rally. In soybeans, trend-following funds were net buyers of 6,713 contracts while index funds were net buyers of just 382 contracts. Trend-followers were big buyers of 14,554 contracts in soybean oil which reduced their net short position to just 2,333 contracts. Index funds were net sellers of 1,261 in oil. In meal, large non-commercial traders were net sellers of just 785 contracts. The Malaysian government has proposed reducing the blend of palm-based diesel fuel to 2-3%. The government had been expected to raise their bio-diesel mandate to a 5% blend in 2010. The proposed reduction is thought to be due mainly to higher prices and a need for the government to save on the cost of related fuel subsidies. Malaysian palm oil exports were estimated to be up 6.8% for October 1-25 from last month according to an independent cargo surveyor. Good weather in Brazil and the move by many producers to plant early and to plant early maturing soybeans could help ease the tightness expected on the world market for early next year. Traders continue to look for a very large production from Brazil, Argentina and Paraguay for 2010. Beginning January, Brazil will raise the biofuel content of its diesel to 5% from 4% previous.

TODAY’S GUIDANCE: Traders are worried this morning that price action in corn and wheat on Friday constituted a reversal of the September-October rally. If it did, this could threaten the rally in the soybean complex as well. However, price action in soybeans was much more mixed on Friday and that may throw traders’ attention back on the dollar which was lower overnight. This supported the complex overnight amid the expected harvest delays from last week’s late rains and some mostly light showers to start the week. Last week’s strong export sales figures continue to run counter to ideas that China and others have already booked much of their needs into early 2010 and that they are shifting their buying to South America for spring shipment. Taking profits on rallies in soybeans is ok, Getting short is not. First support remains at 1000 in January soybeans with next support near 982 to 985 and then near 975. We would still put light and temporary resistance at 1028 1/2 even though the January contract pushed just past that level on Friday. More substantial resistance lies in a zone from 1040 to 1050.

TODAY’S MARKET IDEAS: The soybean market had every reason to break sharply on Friday, but it did not. However, today may be the key test for bulls.