Grains Oilseeds

[Arctec]

ECATTLE STRATEGIES

In our last newsletter, we laid out the potential short term bearish factors for the livestock markets and bearish strategies to take advantage of a potential break in the weather and surge in meat production. The selling strategies worked out well but the trades were short term in nature, as the initial phase of a shift in corn from a food to an energy market is likely to cause the jump in feedgrain prices to be passed on to the consumer in the form of higher meat prices. Without sharply higher feedgrain prices or a collapse in the world economy, the outlook for pork and beef prices into the summer is bullish, as both pork and beef production back away from the burdensome levels seen late last year and early this year.



For the Cattle on Feed report (to be released just after this writing) the market expects to see December feedlot placements down near 16% from last year. This would be the 6th month in a row of lower placements. If placements are down enough, on-feed supply may dip under year ago levels for the first time in the last 16 months. Marketings are expected to be in the range of 99.7-106% of last year and on-feed supply near 96.4%-99%. The numbers suggest that once the market absorbs the heavy upfront supply of cattle, feedlot supply will eventually drop and that available supply will tighten into the spring.

In the last five years 2nd quarter beef production has come in about 400 million pounds to 625 million pounds above the 1st quarter production. The USDA projects an increase of just 440 million pounds for 2007. This number is likely to be revised lower in the months just ahead as the USDA takes into account the sharp drop in average weights, the excessive loss of younger cattle from this past winter and the impact of the sharp drop in marketings. On top of the drop in production, the market must also absorb the slow but steady progress in rebuilding the export market for US beef. As the declining production clashes with the improving demand for beef typically seen in the spring, June cattle appears to have significant upside potential.

June cattle are still operating under the negative influence of the February 14th reversal from the contract high. Look to buy corrective breaks or position with bullish option plays on a corrective break into late February.

Suggested Trading Strategies: 1) Buy June cattle at 91.02 with an objective of 95.77. Risk to a close under 90.32. 2) Buy June cattle futures and sell the June cattle 96 call and use the premium to pay for part of a June 91 put. Hold for a run to 95.77 in June cattle. If the market breaks first, lift the June 91 put on a break to 90.77 and also lift the June call and use a 65 point stop in the long futures leg.