Feature Article

Erratic Weather Makes Soybean Yield the Market's Focus

By Jerry Gidel, RJO Futures Research Trading Analyst

For the second year in a row, August weather wasn't positive for U.S. soybean production. After excessive moisture delayed planting across the Midwest this spring, cool temperatures limited plant growth through July. Then below-normal rainfall across the majority of the U.S. growing area last month prompted output concerns, before hurricane rainfall arrived in many areas the past few weeks. Because of these extremes, the U.S. Department of Agriculture's (USDA) September 12 soybean crop update will be highly anticipated — and could be highly influential on the coming year's agricultural prices.

Building dryness was noted during last month's Midwest crop tour. But this year's late start and cool temperatures during the growing season, reducing pod counts in most areas for second year in row, probably are more important factors. Because of tour numbers and dryness continuing in the Eastern Corn Belt and the Southeast until last week's hurricane rains, we reduced these two areas' average yields by 0.7 and 0.5 from last month. Meanwhile, rains during late August prompted us to raise the Western Corn Belt's and Delta's average prospects by 0.7 and 1.0 bu. per acre versus the USDA's August levels. Overall, September's U.S. bean output estimate might rise 14 million to 2.987 billion — resulting in a 40.7 national yield. But the impact of this year's growing season on 2008 crop size probably won't be known until producers' combines hit the fields in another two to three weeks.

Strong late-season export shipments suggest that the USDA's old crop export forecast (1.145 billion) will likely be achieved, but disappointing Census crush reports in the past two months prompt us to expect the USDA's 2007/08 processing demand will likely be cut by 10 million bu. — resulting in a 10 million bu. increase in old-crop stocks, to 145 million on Friday's soybean supply/demand update.

Overall, 2008's U.S. soybean crop doesn't appear likely to improve our internal tightness or expand world supplies sharply, suggesting that South America's planting and growing conditions and the need for more U.S. seedings could prompt stronger post-harvest prices. However, negative economic news and limited pre-harvest demand could let spot prices slip to $11-$11.35 range over the next month, if no early frost occurs in the U.S. in the next few weeks.

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Interest Rates

By Donna Heidkamp, RJO Futures Senior Trading Advisor

The biggest news in the market has been the announcement of nationalization efforts of Fannie Mae and Freddie Mac. The announcement might not have been totally unexpected, but did seem to catch the market off guard as rumors started flying late Friday afternoon. As a result of the rumors, the stock indexes rallied hard, the interest rates sold off and the commodities rallied as a result of its perceived effect on inflation. Many people assumed that this action taken by the U.S. Treasury would be financially backed by the Fed. In other words, it was assumed that the Fed would increase the money supply. According to the law of supply and demand, the U.S. Dollar would sell off as a result of increased supply. The weakness in the dollar would in turn increase the risks of inflation in the market. According to Dennis Gartman of The Gartman Letter, once the Treasury made it clear that it was going to make good on all debt securities held by sovereign wealth funds and that the Fed was not involved in backing the plan, the markets began to reverse. From what I am reading and hearing, the majority of the issues that encouraged the Treasury to take over these entities lay with changes in accounting practices and the delays in reporting and writing off bad loans. Since Fannie Mae and Freddie Mac back such a large percentage of U.S. mortgages, it was vital that the government step up. A large percentage of their preferred stock is also held by many banks. Therefore, it helped support many financial company stocks.

Now that the peak season in the housing market is coming to an end, it is no surprise that pending home sales came out weaker than expected at -3.2% versus -1.4% expected and +5.8% last month. As a result of the Fannie Mae and Freddie takeover, the mortgage industry is expecting mortgage rates to decline. As a result, many potential buyers may delay stepping up to the plate to purchase a home.

The data on growth continues to come out mixed. The Q2 Preliminary gross domestic product (GDP) came out at +3.3% versus +2.7% and +1.9% previously. The strength clearly surprised the market. The durable goods orders were up 1.3%, even though the housing market continues to contract. The factory orders were up 1.3% as well. The Chicago Purchasing Managers' Index (PMI) came out at 57.9, which indicates that the manufacturing sector is expanding at the moment. (This could be a one month anomaly though.) The market expected the report to come out at 50, which is neither expanding nor contracting. It is interesting to note that the wholesale inventories are declining by 1.4%, even as manufacturing is starting to expand. Construction spending is also declining at the moment. The bottom line is that consumers are watching their spending habits closer than they have in a really long time, as a result of economic uncertainty and possible continued inflation.

Finally, I would like to comment on the employment situation. We continue to see decreases in both the monthly non-farm payrolls and increases in the weekly jobless claims. Last week's jobless claims came out at +444K versus +429K the previous week. The trend is for higher unemployment levels at the moment. The monthly non-farm payrolls fell by 84K jobs versus 60K the previous month. The trend is still weakening, which is also causing consumers to watch their spending habits more closely.

Fed Watch:
The odds of a rate change are slim through December. Both the risks of inflation and economic recession are increasing and offsetting any sort of rate change near term.

Technical Update for December 10-Year Notes:
Near-Term Trend: Higher, but look for a reversal
Long-Term Trend: Higher
Support: 115-18.0; 114-23.0
Resistance: 118-26.0; 121-25.0
The daily chart continues to point to higher prices. However, the 117-00.0 level is proving to be a formidable resistance point. Considering the overbought stochastic numbers and sideways momentum on the daily chart, this could become a good near-term sell in the market.

If you are currently long the December TY Notes, I recommend working an order to Sell 2 TYZ 115-18.0 SCO to reverse your long position.

Economic Calendar:
9/11/08 - US Trade Balance - 7:30 am CST
9/11/08 - Weekly Jobless Claims - 7:30 am CST
9/11/08 - EIA Gas Storage - 9:30 am CST
9/12/08 - PPI - 7:30 am CST
9/12/08 - Retail Sales - 7:30 am CST
9/12/08 - Business Inventories - 9:00 am CST
9/15/08 - Industrial Production & Capacity Utilization - 8:15 am CST
9/16/08 - CPI - 7:30 am CST
9/16/08 - Real Earnings - 7:30 am CST
9/16/08 - FOMC Meeting - 1:15 pm CST
9/17/08 - API/EIA Crude Inventories - 9:35 am CST
9/17/08 - Housing Starts - 7:30 am CST
9/18/08 - Weekly Jobless Claims - 7:30 am CST
9/18/08 - Leading Indicators - 9:00 am CST
9/18/08 - Philadelphia Fed Index - 9:00 am CST
9/24/08 - API/EIA Energy Stocks - 9:30 am CST

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Agriculturals

By Jerry Gidel, RJO Futures Research Trading Analyst

After last spring's wet weather delayed plantings and slowed emergence leading to flooding in parts of the Midwest in June, normal to below temperatures and late season dryness across the Corn Belt has resulted in a challenging 2008 growing season for U.S. corn producers. The U.S. Department of Agriculture (USDA) will try to quantify the impact of this year's highly diverse weather, when it releases its next monthly crop production report on September 12.

Field results from this year's Pro Farmer crop tours, which covered the major producing area of the Midwest, confirmed the rising plant population that the USDA mentioned in last month's report. However, reduced ear length, August dryness reducing kernel filling and the slow maturity of this year's crop because of moderate to cool temperatures were issues that have been raised — which could impact the size of the 2008 corn crop. Because of these factors, we reduced our expectations for the Eastern Corn Belt (2.7 bu.) and Kentucky, Tennessee and Missouri from last month — while boosting Iowa and Minnesota because of late August rains. Overall, our U.S. yield estimate declined 1 bu. to 154 bu. per acre — resulting in 12.21 billion bu. crop versus 12.288 billion last month.

This year's slow maturity of the corn crop won't help the USDA calculate a yield estimate either — with this week's progress report noting only 62% of 2008 crop is dented (up from 45% last week), but sharply behind last year's 87% pace and the 5-year-average level of 79%. Interestingly, no national weekly corn harvest progress level was released this week — the first time the USDA hasn't began this data by this time since 1993. This delay also highlights the limited new field data availability, with just 11% of this year's crop reported as mature versus 38% in 2007, to project 2008's ear weights accurately for another month.

No major old crop demand adjustments are expected in the USDA supply and demand, as it waits for the stocks report on September 30. But trade talk about 2008/09's export sales being reduced seems premature, with the current sales ahead of the normal seasonal pace versus looking at 2007 only. Overall, the upcoming USDA report might not provide much news. So corn's recent daily price factors of crude oil, general economic attitudes and the value of the dollar could continue — with December corn possibly slipping to the $4.90 to $5.00 area. But an acreage battle with beans should help rebound values post harvest.

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Agriculturals

By Stephen Davis, RJO Futures Senior Trading Advisor

Monday was another erratic day and night session, reflecting the uncertainty of grain fundamentals and outside financial and political developments. The grain market was able to stay firm, despite the surge in the U.S. Dollar after Washington took over our national mortgage giants. Clearly, some concerns regarding financial market liquidity has prompted some fund liquidation in recent months. Funds are long only 176,000 corn now vs. long of 380,000 in February. Funds have now liquidated from long 160,000 soy futures in Feb. to only 70,000 now. The funds now have a small short position in soy oil as petroleum prices have moved lower.

It looks like more liquidation will follow. Fund managers are likely to further reduce their exposure to commodities amid falling prices and negative returns. And with housing, equity and now commodity markets all in a free fall, the pressures on investors is great. The bottom line is that grain charts speak for themselves. There is not much hope for longs, and continue to expect funds and farmers to sell on rallies.

Soybeans, in the wake of last week's huge $1.47 break and 2008 soybean yield uncertainty, might be due some consolidation. Posting a new low in SX8 ahead of the Sept. crop report would certainly be a defeat for the bulls, and a signal that the soybean market is more concerned over slowing economic growth than shrinking 2008-2009 supply prospects.

The U.S. Department of Agriculture will be out with its September crop report on Friday. The trade will be anxious about production estimates with U.S. corn and soybean crop condition ratings declining during August. Friday's crop report is unlikely to fully reflect the true size of this year's U.S. corn and soybean crop size. A better reflection will be offered in October. It is in the October report that we expect reduced test weight in corn and small seed size in soybeans.

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Energies

By Christy Olin, RJO Futures Trading Consultant

Energy futures continue to trade lower as the hurricanes of the Atlantic continue to avoid the U.S. crude and natural gas facilities. Global economies are weakening as well, while OPEC meets this week to discuss its oil production quotas.

Crude oil has continued to trade lower as global demand decreases, and the hurricane threats wane. Both Hurricane Gustav and Tropical Storm Hanna missed the major oil and natural gas regions in the U.S., and the latest data show Ike now moving south of the U.S. oil facilities and north of the Mexican facilities. OPEC met on Monday and Tuesday of this week to discuss oil output. It is largely expected that OPEC will decide to leave production quotas alone. Last week, the representative from Saudi Arabia was quoted as saying the market is over-supplied as it is — and could probably sustain prices down to $100 per barrel. Many market analysts believe that it probably created a price target for this market. Crude, basis October, broke through the $112 support in one fell swoop on September 2nd and has not looked back. The next level of support is around 102 — and then below there, that psychologically important $100. The inventory reports in the U.S. for crude oil and its distillates come out on Wednesday the 10th; experts anticipate a draw on inventories this week. This may provide brief support and potentially another opportunity to get short in this market — because without a surprise threat to supply, either from OPEC or Mother Nature, the market is likely to continue lower.

The day after the U.S. celebrated Labor Day, the official end of driving season, the reformulated gasoline blendstock for oxygen blending (RBOB) market traded in a very wide range from 290 to 260 — and settled below the 280 support level. Typically, demand for gasoline drops off heading into the winter months. And with the current economic situation, this year is not likely to be an exception. There has been little relief at the pumps in the U.S., despite the fall in futures prices. The hurricanes have caused some oil refineries to pause in production, but no material damage has been reported. There has been a draw seen in the inventories over the past several weeks, with little effect on trading. The market seems to be more resistant to trading lower. But with crude falling so sharply, the RBOB has followed suit. This market is not yet in oversold territory, and momentum appears to be pointing downward.

Natural gas is still in a downtrend, but is starting to show signs of strength. Natural gas saw another big injection into inventories last week, the market is well-, if not over-, supplied. However, heading into the winter months, the heating demand will increase. This market tends to be the most sensitive to hurricane news; it closed higher for three days in a row late last week, in anticipation of Hurricane Ike. Now that its path has veered south, natural gas is trading lower. Without a fresh supply threat, there could be more weakness ahead. Until the Midwest cools down, or entrepreneur T. Boone Pickens has his way with developing natural gas into a fuel for transportation vehicles, it is going to be difficult to rally out of this bear market.

Support/Resistance:

Oct Crude -- 10158, 10000 / 10662, 11220
Oct RBOB -- 26092, 25674 / 28087, 28486
Oct Nat Gas -- 7028, 7000 / 7736, 7970

Oct Crude Oil:

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Softs

By Joe Nikruto, RJO Futures Senior Trading Advisor

Look out below. Heavy rains from Tropical Storm Fay and the threat from hurricanes like Gustav and Ike were not enough to keep orange juice from dropping like a hot rock. In the last three trading days, after failing yet again at the 50 day moving average, orange juice has dropped almost 25 full points. The chart shown here points to an increase in open interest, and decent volume too. This speaks to new participants entering short positions, not just speculative capitulation from hurricane hopefuls. This market may also be taking its dose of "Just get me out!" — which is plaguing the rest of commodities in general, what with hedge funds taking chips off the table by the handful.

A quick glance on the shelf of the local grocery chain this week saw a well-known brand-name orange juice selling for $6.99 per gallon. Seven bucks for a gallon! That's almost twice as much as milk — and is almost 2 gallons of gasoline. The only reason I mention it is that we are starting to see the idea of demand destruction get traction in other markets, such as feed grains and crude oil. Consumers, be they cattle feeders or hockey moms, are starting to make adjustments to how much and what they consume. The long-term implications of this adjustment do not bode well for frozen concentrated orange juice. Absent some new health claim or a significant reduction in price at retail, I would expect demand to continue to be anemic and futures to remain under pressure.

The big drop here in the last three days has traders trying to buy the break. That is an aggressive move, and it might pay off. Instead, I might look for a rally to short in the area near the 10-day and 18-day moving averages, roughly 108.00 or even the 50 percent retracement for more aggressive traders (roughly 105.00). The market did not reach our last recommended level, 123.00, for a short sale — and the train certainly left the station on that one. We risk the same thing happening here, but I would rather take a more cautious approach and trade in the direction of the overall trend. Should the market allow us to get short, I would use the 115.40 and 118.70 areas for risk management stops. We are still in the throes of hurricane season, and this market can pop just as fast it drops. Protect your trading capital!

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Currencies

By Nick DeVore, RJO Futures Trading Consultant

The U.S. Dollar (USD) has continued to maintain the bullish rally with limited interruption. The upcoming days, though, shall prove whether the USD has the strength to continue the rally in spite of foreseeable weak U.S. economic numbers. Again, the USD can rally by default, dependent on how European economic numbers (with important German numbers on 9/16) are released. In the meantime, a bounce is likely with the currency majors against the USD — as it is overbought and the weak U.S. economic numbers over the next few days could stall the rally briefly, with the USD potentially dropping to the 79.000-78.000 level. The Japanese Yen showed strength as the Bank of Japan deliberates on interest rates over the next six months, with some analysts stating a rate hike is likely for early 2009. Most eyes are on the Euro though, which could see the currency trading at the 1.3400 level in the near future. Remember, it was only a few months ago that traders were looking at 1.8000 for the Euro. Lastly, the British Pound, which hasn't seen this significant of a drop since George Soros risked $10 billion in shorting the British Pound in 1992. Again, the Bank of England is under pressure to cut rates and stimulate some growth back into the British economy, but it continues to drag its feet to do so.

Pay close attention to crude oil as it nears the $100 level; a break below $100 should have bullish implications for the USD. Expect the USD to have a minor pullback in the near term, but the bulls will continue to have their way and the bears will have their way with the Euro and Pound.

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Metals

By Vincent Hayes, RJO Futures Managing Broker

Gold has continued to drop. (In the last eView, I mentioned to look for a continued short-term drop in gold until a turnaround point of about 777.) The market has dropped below lows that point to 766.39, and has since bounced up to 778.10. I have drawn two support levels at 759.5 and 735.2. And we could see the market drop to those levels, before there is a correction.

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Ask an Advisor

Question: Besides housing, what else determines lumber futures prices?

Answer: Thanks for your question. Lumber is affected by supply and demand, just as other markets are. Supply can be affected by mill closings, environmental policy constraints, and more. (Recently, a Federal judge blocked some logging to protect the endangered Northern spotted owl, causing lumber futures prices to shoot upward.) Demand can be affected by interest rates and other economics that affect housing starts, as well as by the hurricane season (with plywood increases for the boarding up of windows and lumber increases for rebuilding efforts).

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Focus on YOUR opinion

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Futures Trading Basics

Top 10 Money Management Rules

By Jim Wyckoff, Contributing Analyst for RJO Futures

Most successful futures traders will tell you that they will usually have more losing trades than winning trades during the span of a year. Then why are they successful? It's because of good money management. On the balance sheet, a few bigger winning trades will more than offset the more numerous smaller losers.

Here are my "Top 10 Money Management Rules."

1. Bulls make a little. Bears make a little. Pigs get slaughtered. In other words, do not be a greedy trader. If you are a bull, don't expect to get in at the bottom and out at the top. If you are a bear, don't expect to pick an exact market top and ride a market all the way down to the lowest low. Thinking otherwise allows the destructive "greed" emotion to take over. Greed has been the ruin of many traders.
2. Any fool can get into a market, but it's the real pros that know when to get out. Indeed, market entry is certainly an important element of successful trading. However, exiting the trade is paramount. Many times, a traders will allow a market to "go against" him or her for way too long and way too far -- meaning big trading losses. See Rule 3.
3. Use protective buy and sell stops. One of the major mistakes many traders make is not using protective buy and sell stops when they enter a trade. Or traders may pull their protective stop, "hoping" the market will turn in their favor. Don't be fooled into using "mental stops." Determining where to place protective buy and sell stops before market entry is one of the best money-management tools available.
4. Don't put all of your eggs in one basket. Using a large percentage of your entire trading account for one trade is unwise. Remember that even professional traders will have more losing trades than winning trades over time. The key to success is minimizing losses on the more numerous losing trades and maximizing profits on the fewer winning trades. See Rule 5.
5. Cut losses short; let winners ride. Using a predetermined protective buy or sell stop will cut your trading losses short. Using a trailing protective stop on trades that become profitable will allow you to maximize profits on the winning trades.
6. Only the markets know for sure. Don't ever think you "know" what a market will do at any given point in time. One of the biggest advantages for sound money management is "knowing that you don't know" what a market will do at any given time. A recipe for trading disaster is thinking you know what a market will do. Remember the old trading adage: "Markets will do anything and everything to frustrate the largest amount of traders."
7. Be humble. When trading profits are taken, be glad that it was not a trading loss. Don't grouse because you left a bunch of money "on the table," after you exited your winning position.
8. On selling options, use caution. There are some traders who do sell options on futures (as opposed to buying options) and make profits doing it. And there are many traders that don't. I heard a veteran speaker at a trading seminar once say: "I made over 40 trades selling options in a year, with 97% winners -- and still lost money." Remember the old saying that if it sounds too good to be true, it usually is.
9. Don't over-trade. Trying to trade too many markets at one time is not good money management. If you run into a losing streak, cut down on trading. Do not try to trade more markets just to quickly recoup lost money.
10. To succeed at trading markets, one must first survive at trading markets. Be conservative with your trading account and trading methods -- especially if you are a less experienced trader. Go for those "base hit" trades, and don't swing for the fence and try to hit a home run in a trading decision. Traders need to survive to trade another day, if they absorb a few losing trades.

For more information on risk management/money management, please click here.

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