THE HIGHTOWER REPORT

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1 Any reproduction or retransmission of this report without the expressed written consent of The Hightower Report is strictly prohibited. Violators are subject to a $15,000 fine. THE HIGHTOWER REPORT this issue Fundamental Trades: Bullish: Bearish: Other: Futures Analysis & Forecasting Cocoa Corn Coffee Soybeans Cattle Hogs Agriculture Market Flash Updates Baker Hughes Oil Rig Count major economic events October 30-Personal Income October 31 - BOJ Meeting - Euro Zone CPI/GDP - Case Shiller Home Index November 1- FOMC Meeting - ADP Employment Survey - ISM Manufacturing Index - Construction Spending November 2 - BOE Meeting - Jobless Claims - Non-Farm Productivity November 2 - Factory Orders - Employment Situation - ISM Non-Manufacturing Index October 27, 2017 Next Week s Economic Focus The expanding growth pattern for the US, Asia and Europe all at the same time may help explain part of the blow-out earnings for key tech stocks this past week, and the GDP increases of more than 3% for the last two quarters in the US indicates a strong economy just ahead. The budget deals done in Congress over the past week open the door for tax reform, and that could fuel significant growth in the economy for This may start to raise concerns about the extremely oversold condition of many commodity markets that have drawn aggressive selling interest from fund traders over the past few months. Funds have been aggressive sellers of corn, wheat, coffee, sugar and natural gas. A nine year high in short-term interest rates plus the uncertainties over the new Fed Chairman might keep bonds trending lower. The jump in the US dollar as global US 2-Year Treasury Constant Maturity Rate investors move back into the US is seen as a bit of a negative for commodity markets. However, demand factors are being revised higher, and this should help support many markets. Early projections for next Friday s monthly employment report are showing a gain of 300,000 jobs, with hourly earnings up weekly market letter HightowerReport.com 2.9%! With billion bushels still unharvested (mostly in the north) with snow and 50 mph winds over the past week and cold and wet weather in the forecast, the corn market could see some positive fundamental news, something that has been lacking for a quite some time. -Terry Roggensack Upcoming Appearances By David Hightower November 13, 2017: USSEC - Seoul, South Korea November 17, 2017: USSEC - Korean Food Association December 7, 2017: DuPont Pioneer - Chicago, IL CME Market Movers Videos Click here for the latest Market Movers Video November 3, 2017: Crop Production December 5, 2017: Crop Production December 15, 2017: Quarterly Hogs & Pigs Page 1

2 COLD WEATHER IRRITATES LATE-HARVEST CORN This week brought in the first winter storm of the season into the upper Midwest states of North Dakota, Minnesota, Wisconsin and Michigan. As much as 4-5 inches of snow has fallen, along with high winds of 40 plus miles per hour and higher. The back edge of the storm also brought high winds into South Dakota, Nebraska and Iowa. Anecdotal reports of producers in Nebraska harvesting after high winds went through on Wednesday night were yielding 30 to 40 bushels per acre less than they were in nearby field prior the storm, due to lodging. The most recent USDA Crop Progress Report showed that as of October 22nd, 38% of the US corn crop was harvested, versus 59% for the same time last year and a five year average of 59%. The central and upper Midwest states were well behind the five year averages, with Indiana 46% harvested versus the five year average of 59%, Iowa 23% vs. 55%, Minnesota 14% vs. 55%, Nebraska 26% vs. 52%, North Dakota 17% vs. 43%, South Dakota 19% vs. 51%, and Wisconsin 15% vs. 37%. Most of these states saw some progress earlier this week, but harvesting will be slow going this weekend. World Corn - Ending Stocks vs. Stocks / Usage Ratio There has been plenty of speculation from traders that producers will likely harvest soybeans first and sell them into the market and leave corn to dry down in the fields before harvesting and storing it. Over the past two years, this strategy has paid off well, with late spring-early summer rallies in corn providing a bulge for producers to sell into. Continued on Next Page... TRADERS TOOLBOX overvalued/undervalued Fundamental Technical COT OVERVALUED Cattle Crude Oil Feeder Cattle Cotton Emini S&P Heating Oil Hogs Hogs Copper UNDERVALUED Corn Corn Natural Gas Natural Gas Coffee Sugar Coffee Canadian Dollar Coffee options scan Undervalued Buy Jan Soybean $ cents Buy Jan Coffee Buy Mar Corn $3.70 call at 7 1/2 cents Overvalued Sell Dec Hog * Sell Dec Cattle * Sell Dec Gold * Trend Reversals Buy Dec Natual Gas Buy Jan Sugar Buy Jan Crude Oil * When selling options, only risk to double the premium received. Page 2

3 COLD WEATHER IRRITATES LATE-HARVEST CORN Continued from Previous Page While seed technology has advanced over the last several years, a study from the Purdue Agronomy Research Center suggests that leaving corn in the field to dry down after physiological maturity can cause yields to disappear. The study suggests that the potential rate of yield loss averages nearly one percent per point decrease in grain moisture content. If mature corn were allowed to dry down ten percentage points in the field (28% to 18% moisture content), the potential yield loss could be as high as ten percent. Based on the October 22nd harvested estimates, the total crop production still in the field for the eight states listed above was roughly billion bushels, 44.7% of the total U.S. production. It seems to us that there may be some risk to late-harvested corn potential. From a technical perspective, the corn market may be trying to form a bottom. Monday s impressive action included a new low for the move just ½ cent from the contract low, followed by an extension up with an outside day higher close. China is embracing a new ethanol program that could push consumption to 15 million tonnes of ethanol per year by Some analysts have commented this week that as much as 70% of the Chinese corn stocks are unusable, even for the corn processing sector. China s ending stocks in the latest USDA report were estimated at 79.2 million tonnes, but many believe their stocks could be double that. Continued on Next Page... Corn -COT -Futures & Options Managed Money Net Position Number Of Contracts Page 3

4 COLD WEATHER IRRITATES LATE-HARVEST CORN Continued from Previous Page World ending stocks and the stocks to usage ratio should continue to decline, with Brazil s 2017/18 production likely to come down from the USDA s estimate of 95 million tonnes. Crop scouts estimated Brazil s corn production at 88 million tonnes this week. The EU s corn production was lowered to 58.4 million tonnes this week, and Argentina s planted area is down 1.1 million hectares from last year. Interior US corn basis levels continue to rise, with the Illinois basis at -7 under from a low of -25 earlier this month and the Omaha basis at -29 from a low of -40. The managed money trader category in the weekly Commitments of Traders reports was net short 174,394 contracts as of October 24th. The peak short position for these traders has been 175,000 to 200,000 contracts, and any weather hiccup in South America would likely spark a short covering event. In our view, the downside potential seems to be 10 to 15 cents, while the upside could be 30 to 50 cents, especially if the producer is a reluctant seller. Suggested Trading Strategy BUY a May Corn $3.80 call and SELL a May Corn $3.50 put for a net cost of 5 ¾ cents. Use an objective of 18 cents on the spread, and risk a total of 6 cents. -Matt Connelly our opinion market by market Market * Stocks Strong earnings, strong economy will support. L Bonds FOMC meeting should signal Dec rate hike. S Dollar Tax reform, good US data will fuel upmove. L Euro Catalonia, "open-ended" QE will pressure. S Gold Soaring dollar, rate hikes point to more weakness. S Silver Pressure from stronger dollar and weak gold. S Copper Liquidation washout sets up near-term buy. L Crude Likely output cut extension providing support. L Gasoline New high for move in a softer demand period. L Nat Gas Oversold heading into NA heating season. L Soybeans Risk of smaller yields on late-harvested soybeans. L Corn Too many producers risk yield with wind; dry down. L Wheat Burdensome supply and stronger US dollar. S Hogs Too much total red meat in November; need break. S L Cattle December at huge premium with supply on rise. S Sugar A bit too oversold but big supply, upside limited. L Coffee Some Brazil trees said to be defoliating; oversold. L Cocoa Lower supply with rising global demand. L Cotton Strong demand from hurricane. L * For traders/commercials who need to be in a market, L = Long, S=Short These reflect our opinions for the next 7 days. They may contradict longer term viewpoints expressed elsewhere in this publication. Page 4

5 AGRICULTURE MARKET FLASH UPDATES Soybean Complex January Soybeans held key uptrend channel support on the early break on Friday, and the chart pattern still looks positive. Late maturing soybean yields have come in below producer expectations, and this may lead to a smaller yield. The USDA lowered yield by ½ bushel per acre for the October report, and if this happens again for the November update, ending stocks could slide towards 377 million bushels from 430 million in the October report and from 475 million in September. China s demand remains strong, Brazil s weather uncertainties are still ahead, and the US harvest is now more than 70% complete. Fund traders are showing a strong willingness to own soybeans. Weekly Hog Slaughter Current vs. Previous vs. 5 Year Avg. Continue to look to buy as the market tests the uptrend channel, and look to $10.25 ¼ as the next upside target for January Soybeans. Hogs We continue to watch for a technical sign of a near-term top for December Hogs, as record pork production for the 4th quarter and the sluggish pace for both US exports and Chinese imports could result in a turn lower in pork values and in the cash hog market over the near-term. The market remains overbought. Production should stay 3-5% above last year in the weeks ahead, and last year s production was a record high. December Hog resistance is at 65.00, with support back at and Continued on Next Page... Page 5

6 AGRICULTURE MARKET FLASH UPDATES Continued from Previous Page Cattle While there are strong reasons to be long February Cattle from a supply perspective, active buying from fund traders and better than expected demand have helped drive December Cattle to their highest level since June 8th. This has left December Cattle at a huge premium to the cash market and looking overbought and overvalued. The increasing supply into the end of the year clashes with $6.55 premium of December to the October contract and suggests that the market is counting on massive demand into the end of the year. The economy is very strong, but the jump in the US dollar may slow export demand. Ample supplies of all meat suggest that December may have a difficult time holding such a strong premium. December normally trades $1.11 under the cash market. That premium is normal because 4th Quarter beef production is usually down 100 to 350 million pounds from the 3rd Quarter. This year, 4th Quarter beef production is expected to be up a record 385 million pounds from the 3rd Quarter, which suggests December Cattle should be trading at a discount, not premium, to the cash market. Look for stiff resistance in December Cattle at , and don t be surprised to see a setback to Coffee The coffee market seems to have priced in a bumper crop in Vietnam to be harvested in November and for a bumper crop in Brazil next year. However, while seasonal rains have returned to Brazil, some areas did not recover from the very dry weather from July to October, and the result may be yield losses for trees that lost flowers during the flowering period. Funds have been aggressive sellers, and this afternoon s COT update showed a new record net short position. Since September 19th when December Coffee traded as high as , open interest has surged more than 50,000 contracts to 240,089 contracts (up 26.4%) as the market has pushed down December Cattle Basis Futures Minus Texas / OK Cash Price Coffee - COT - Futures & Options Managed Money Net Position Number Of Contracts to This shows an extremely oversold status, and it suggests that a minor supportive fundamental event could spark major speculative buying. Support for December Coffee is at , with and as upside targets. -Terry Roggensack Page 6

7 PULLBACKS CREATE BUYING OPPORTUNITIES FOR COCOA Since the middle of August, cocoa has been in a defined, albeit choppy, uptrend. With bullish developments coming from both the supply and demand sides of the market, it may be ready to make an extended upside move above its April-October consolidation zone. The main source of strength for cocoa over the past few months has been an improvement in global demand. It appears the having prices at their lowest levels in a decade is finally encouraging buyers to become more aggressive. The latest quarterly grindings results showed the three major regions (Europe, Asia and North America) with positive year-over-year results for the third quarter. While North American grindings were below forecasts, a much stronger dollar can help to improve upon that total in the fourth quarter. Following record high global production last season, the supply side of the market is starting to tighten. This season s output from Ivory Coast and Ghana (who together produce more than 60% of the world s cocoa) are expected to see a 10% to 15% decline from last season. Indonesia could see a decline as well, while Cameroon is having problems with black pod disease that could negatively impact their production. If global demand increases 3% to 5% while Ivory Coast and Ghana see significant declines in output, the 2017/18 season could end up with a modest deficit. This is in sharp contrast to the 370,000-tonne surplus of for 2016/17. Suggested Trading Strategies 1) BUY March Cocoa at $2,057 with an objective of $2,263. Risk the trade to $2,005. 2) Bull Call Spread - BUY a February Cocoa $2,200 call and SELL a February Cocoa $2,400 call for a net cost of $27 or better. Use an objective of $110 on the spread, and risk the entire spread premium. - Stephen Maass Cocoa Global Supply/Demand Balance Thousand Tonnes / Season-Long Total Page 7

8 Decline in Baker Hughes Oil Rig Count Early Sign of Production Top The energy complex finished this past week on a very strong note, as crude oil reached a new 6-month high while both product markets (RBOB and ULSD) reached multi-year highs. Comments by Saudi Crown Prince bin Salman endorsing an extension of output cuts in the Oil Producers Agreement were one catalyst for the rally. There was another development closer to home that provided a significant boost to the market as well, and may prove to be a longer-term source of support. The Baker Hughes North American Oil Rig Count measures active drilling rigs on a weekly basis. Many analyst and traders view this data as a gauge for how aggressively oil companies are exploring for new sources of oil. US crude oil production has been on the upswing in recent years, and despite a few hiccups over the past few weeks, it has climbed back above the 9.5 million barrel per day (bpd) level. This has weighed on energy prices, as increasing US production and exports were seen as offsetting the output cuts by major producing nations. The latest Baker Hughes Oil Rig Count came in at 737, an increase of one rig from the previous week. However, this was only the second weekly increase in the past eleven weeks since they posted a 2017 high in mid-august, with oil rigs falling by 31 over that timeframe. While US crude oil production is expected to post a new all-time high above 9.61 million bpd, the decline in oil rigs since summer could make it difficult for the US to climb above the 10 million bpd level. - Stephen Maass Weekly Baker Hughes Rig Count North American Oil Rigs / Weekly Page 8

9 Longer-Term Investment Trades updates to prior longer-term trade strategies Original Trade Date Trade Action Corn 3/17/17 Long a December Corn $4.10 call at 22 1/2 cents. Previously short a December Corn $3.30 put at 7 1/2 cents that was bought back at 1 1/2 cents for a profi t of 6 cents, and previously short a December $5.10 call at 6 1/4 cents that was bought back at 2 3/4 cents for a profi t of 3 1/2 cents. Hold the December Corn $4.10 call for now. Soybeans/Corn 7/21/17 Short 1 December Corn $4.10 call at 13 cents. Previously long 2 November Soybean $11.40 calls from 13 1/2 cents each that expired at 0 for a loss of 27 cents. Risk the strategy to a net loss on a closing basis of $800. Cattle 9/15/17 BUY a February Cattle call at 382 or better. CANCEL STRATEGY - We will look to reestablish in a future newsletter. Corn 9/15/17 Long a May Corn $3.80 call and short a May Corn $3.50 put for a net premium paid of 5 cents. Use an objective of 33 cents, and risk a total of 9 cents from entry. Bonds 10/13/17 SELL December Bonds at Use an objective of , and risk the trade to a print above Natural Gas 10/20/17 BOUGHT March Natural Gas at $ Use an objective of $3.60, and risk the position to a close below $3.00. Cotton 10/20/17 SOLD a March Cotton call and BOUGHT a March Cotton put for a net cost of 50 points. Use an objective of 275 points on the spread, and risk a total of 75 points from entry. Trade recommendations are only suggestions. This is not to be construed as a trading system or tracking account. No representation is being made that any account will or is likely to achieve profits or losses to those shown. By reading or following this report, you acknowledge and accept that all trading decisions are your own sole responsibility, and The Hightower Report or anybody associated with The Hightower Report cannot be held responsible for any losses that are incurred as a result. Trade fills are hypothetical. Traders may not be able to enter or exit the trades exactly at the prices indicated due to liquidity or market slippage. Page 9

10 Commodity Trading Guide 2018 Calendar Encyclopedia Almanac Futures and Options Expiration Dates Ten Years of Suppy and Demand Tables Government & Industry Report Dates All-Time Contract High and Low Prices Global Crop Calendars Over 350 Charts & Graphs Contract Specifications Only $20 each! Go to futures-research.com or call commitments of traders Market Data As of October 24, 2017 Non-Commercial & Non-Reportable Combined Futures & Options Net Position Net Change 4-Wk Net Change Grains CBOT Grains -144,099-45,167-43, Corn -94,686-14,562-45,107 4 KC Wheat 1,758-2,880-17,844 6 Minn Wheat 3, Oats 3, Rice Soybeans 9,220-27,680 13, Soyoil 70,392 10,287 10, Soymeal 49,684-7,757 15, Wheat -58,633-2,925-12, Livestock Cattle 104,622 7,794 9, Feeder Cattle 6, , Hogs 35,630 1,961 6, Metals Copper 55,362 1,972 15, Gold 218,602-13,475-15, Platinum 27,115-3, Silver 76,250 1,595 7, Softs Cocoa 7,931 10,232 17, Coffee -30,319-3,799-13,703 1 Cotton 61, , Lumber 2, Milk 1, OJ 2, Sugar -64,198 4,115-5,495 6 Currencies Canadian 92,401-6,097-8, Dollar 2, Euro 106,527-4,578-6, Energies Crude Oil 493,710 17,779-15, Gas (RBOB) 80,752 5,825-5, Wk Ranking This report includes information from sources believed to be reliable, but Heating Oil 76, , no independent verification has been made, and we do not guarantee Natural Gas -49,746-13,993-1,666 5 its accuracy or completeness. Opinions expressed are subject to change Financials without notice. This report should not be construed as a request to Bonds 26,709-7,854 16, engage in any transaction involving the purchase or sale of a futures E-Mini S&P 84,967 5,723 47, contract and/or commodity option thereon. The risk of loss in trading Dow Jones $5 81, , futures contracts or commodity options can be substantial, and investors S&P , should carefully consider the inherent risks of such an investment in light T-Notes -142,786-2, , of their financial condition. Any reproduction or retransmission of this Extreme Ranking 1 = Shortest Short report without the expressed written consent of The Hightower Report 5% of Extreme 52 = Longest Long is strictly prohibited. The data contained herein is subject to revision; independent verification is recommended. Any third party opinions THE HIGHTOWER REPORT regarding 141 West Jackson this report Suite are not 4002 necessarily Chicago, those Illinois of the authors Due to the weekly market info@hightowerreport.com volitile nature Trading of futures and contracts options and markets, commodity the information options involves contained substantial Subscriptions: risk of loss, $25 and per thus Month is not appropriate for all investors. herein may be outdated Investors upon should its carefully release. consider the inherent risks of such an investment in light of their financial condition. Page 10