Grains Oilseeds

[Arctec]

CORN STRATEGIES

A reversal from a contract high on February 20th for May corn combined with a record net long position of the fund trader and continued talk of an enormous jump in planted area has corn bulls nervous that a top is in place. While it may sound logical to expect a setback in prices into the key March 30th planted acreage report, it seems unlikely that the market will see a major break ahead of the growing season with extremely tight stocks at the end of the 2006/2007 season and weather uncertainty for the coming year.

Talk of a La Nina weather event into the summer, which might bring drier than normal weather to parts of the Midwest this year, was the foundation of the rally to the new contract highs on February 20th. On top of increased plantings from cotton and soybeans, there is some talk that the wet areas of southern Illinois which were planted to winter wheat could be plowed up and planted for corn or soybeans this spring. Spring wheat, peanut and tobacco areas are also under the gun to see a shift to corn.



So far, the move in corn prices above $4.00 per bushel has scared the trade into thinking that corn usage will drop off dramatically, but this has not been the case. Ethanol production was a record high in the last reporting month and livestock producers are struggling to make profits, but there is little talk of a significant liquidation in numbers to see a significant drop in usage. Weekly US export sales for corn came in at 1.389 million metric tonnes last week, which was well above trade expectations between 700,000 and 900,000. Cumulative sales have already reached 64.8% of the USDA forecast for the entire season (see chart) as compared to 53.9% on average over the last five years. Sales of 686,000 metric tonnes per week are needed to reach the USDA estimate.

While there is a possibility of a 50 cent break from the highs, we still believe that a $1.00 rally is more likely than a break into the March 30th report. In addition, the market has already illustrated the extreme sensitivity to weather for the coming year.

Suggested Trading Strategy: Buy 1 July corn futures contract and buy 2 of the December 360 puts for 14 1/2 cents each. Use 448 and then 498 in the July futures as next upside objectives. On a 40 cent corrective break, the trader will be in a position to exit one or both of the puts for around 30 cents each and hold the futures for a look at the early growing weather.