The Hightower Report

SOYBEANS

The soybean market has seen a collapse of more than $3.00 since late August and is extremely oversold going into the key October USDA Crop Production and Supply Demand reports on Wednesday, October 12th. On top of the bearish macroeconomic news of the past six weeks, the market is also absorbing better weather for September and a general expectation for higher yields in the report. There have been recent indications that yield in areas which were hit with dryness could be down due to low moisture content. However, we still expect to see a jump in yield to around 42.8 bushels/acre, up 1 bushel/acre from last month. While the late start to corn plantings might have pushed actual soybean planted area a bit higher, the FSA data has indicated the opposite. We lowered our estimate of harvested acreage by 100,000 acres. With a record South America supply on September 1st, we also lowered our export forecast by 10 million bushels. As a result, we see ending stocks increasing to 233 million bushels from 165 projected last month. This would push the stocks/usage ratio to 7.4%, a 5-year high.

PRICE OUTLOOK: We see a bounce in January soybeans to the 1211 3/4 to 1266 3/4 zone as a selling opportunity, with 1145 and 1139 as next downside objectives.

CORN

There is also plenty of talk from the early harvest of higher than expected yield. While the weather in July was some of the worst on record, subsoil moisture ahead of the heat was good. Producers used record high profitability on paper to justify spending more on inputs (such as fertilizer) in order to attain optimal yields. On top of that, the weather in September was nearly ideal. We are looking for a jump in yield in this report to the vicinity of 150 bushels/acre, up from 148.1 last month. This would more than offset a drop the harvested acreage of 500,000 acres that we think resulted from the poor weather earlier in the growing season. Based on these changes, we are looking for production to come in around 12.585 billion bushels, which is still below projected usage. We have lowered our estimate of ethanol usage by 25 million bushels and have raised our exports estimate by 50 million bushels due to expected increases in demand from China. As a result, we see ending stocks increasing to 943 million bushels from 672 projected last month. This would push the stocks/usage ratio to 7.4%.

PRICE OUTLOOK: The increase in ending stocks is expected, and even if yield is left unchanged, ending stocks will increase to 858 million bushels (784 million with the acreage adjustment), so it will be tough to see a bullish surprise for the report. Our concern is that the soybean numbers could be negative enough to carry the other grains lower after the report. The long liquidation trend by hedge funds and index funds is a concern. Look for December corn resistance at the 630 to 651 zone, with support at the 575 to 551 zone.

WHEAT

The Quarterly Grain Stocks and Small Grains numbers (which included wheat production were released last week, so a good deal of the uncertainty in the wheat outlook has already been absorbed by the market. As a result, the “by class” estimates will be the most important data for the wheat market in Wednesday’s Supply/Demand report. Hard spring wheat ending stocks could slip below 100 million bushels, which would be the second tightest on record. (In 2007, record low stocks contributed to the rally to $24.00 per bushel.) While this could be the bullish highlight of the report, US total ending stocks and especially world ending stocks data are not showing any abnormal tightness. US ending stocks could drop to 725 million bushels from 761 million last month and 861 million last year. Production was already revised down by 69 million bushels last week.

PRICE OUTLOOK: With the extremely oversold condition, it will not take much in the way of positive news or even some relief from global economic concerns to spark at least a short-covering bounce in wheat. Dryness in Ukraine is still an issue, and there could also be a return to dry weather in the US southern plains that could spark concerns for next year’s supply. Given the huge profitability for corn and soybean producers around the world, the wheat market might also be caught up in a battle for planted acreage. Close-in support for December wheat is 610, with 642 and 676 1/2 as stiff resistance. The double bottom might spark some short-covering ahead, with funds holding a record high net long position.

COTTON

Traders see yields coming down for this report, which could drag production down by 150,000-250,000 bales. Pakistan’s production may also be revised lower. However, there are still concerns that other key exporters like India will be more competitive than the US, which could raise questions on the ability of the US to export 12 million bales this season. It is too early in the marketing year and the current export pace is too strong for us to expect the USDA to revise is US export estimate lower. With that in mind, the US ending stocks might come in at 3.2 to 3.3 million bales versus 3.4 million last month and 2.6 million last year. World demand is still in question as well, so lower US and Pakistan production estimates may not necessarily lower world ending stocks.

PRICE OUTLOOK: Look for a range of 106.80 to 94.55 for December cotton over the near term.