Grains Oilseeds

[Arctec]

CORN STRATEGIES

While we would have believed that the rally in corn to a ten year high would have encouraged a shift in planted area of 12-14 million acres to corn, recent trade estimates suggest an increase of only 9 million acres. This could leave the longer term outlook for the corn market quite bullish as the market approaches a key planted acreage report on March 30th. At their recent annual Outlook Forum, the USDA presented a preliminary supply/demand outlook for the 2007/2008 season which pegged planted acreage at 87.0 million acres, while the Food and Agriculture Policy Research Institute (FAPRI) projected planted acreage at 86.7 million acres and the American Farm Bureau Federation at 86.5 million acres. These estimates are up 8.7 million, up 8.4 million and up 8.2 million acres respectively from last year. Reports from seed companies and commodity firms, however, are still in the plus 10 to plus 14 million acre range.

Either way, the key factor for prices for the coming year will be yield, and the market is already sensitive to longer-term weather forecasts which call for a wet spring and a hot and dry summer. In order to get 90 million or so acres planted this spring in the optimal timing window, it will take some good planting weather. In some years, the spring weather can mean a swing of 1-2 million acres either way. To illustrate the extremely bullish setup for the market "if" the planted area increases by just 9 million acres, the enclosed table shows this scenario with a lower, medium and high yield for the coming season. If average yield comes in near 152.5 bushels per acre (compared to 149.1 last year), ending stocks are likely to come in near 615 million bushels, which would amount to a 5% stocks/usage ratio for the season. This matches the lowest in history (1995/96) when corn prices moved to an all-time high of 554 1/2 cents per bushel. A lower yield will result in significant price rationing, as demand numbers will need to fall, while a high yield would result in a stock/usage ratio of just 8.6%, still the 3rd lowest in 33 years. While we believe planted area will be closer to a 12 million acre increase, the exercise illustrates the significant impact that the ethanol sector (at about 27% of total usage) will have on the corn supply.

Open interest fell 104,367 contracts in the 8 trading sessions ending March 6th, as some liquidation was likely during a period of uncertain global demand trends. Brazil officials pegged the new corn crop at 48.75 million tonnes last week as compared with 47.92 million as their previous forecast and 42.5 million tonnes last year. Mexico plans to open a 1.4 million tonne import quota for US yellow corn to be used as animal feed. Weekly US export sales for corn for the week ending February 22nd came in at just 356,600 metric tonnes, which was the lowest weekly total since August of 2005. Cumulative sales, however have reached 66.8% of the USDA forecast for the entire year as compared to 57.8% on average over the last five years.

Suggested Trading Strategies: 1) Buy July corn at 414 1/2 with an objective of 494. Risk the trade to a close under 403 1/2. 2) Buy the July 440/540 bull call spread at 21 cents with an objective of 46 cents. Risk 8 cents from entry. 3) Buy September corn futures and at the same time buy two of the September 380 puts. Use 477 1/2 as upside objective for the futures. On a 40-50 cent break in futures, look to lift at least one of the puts to offset the part of the losses in futures. This should leave the trader in a good position to benefit from what looks to be one of the more volatile spring and summer time frames in the history of the corn market.