More Downward Pressure on Wheat

Earlier in the week, we saw French sales of wheat into Latin America, now we are also hearing about sales from the Black Sea into Latin America. Continued USD strength today pushed May wheat to new contract lows. May CBOT dropped a bit more than KC and MGE: May KC/CBOT firmed to 11 and change, while May MGE went to a 32 cent premium. Calendar spreads were little changed.

We have to remember that there is no necessity for protein premiums to widen in a bear market. This market dynamic seems a function of investor appetite for commodity index products. Should the USD weaken, or energy prices spike up, or the Oracle of Omaha hint he likes silver again, we could see renewed commodity investment and a sharp turn in the intermarket wheat futures spreads. We took off most of our intermarket exposure today; we are almost flat in May MGE with a modest position long May KC/ short CBOT.

I haven't been looking at wheat vs other commodities very closely; I assumed that with May futures at over 1.3X corn, there would not be any real substitution effect. At 1.1-1.15X corn, it usually makes sense to feed livestock wheat instead of corn and soybean meal. This doesn't last for long-cows do not get croissants or bagels in a sane world. Anyway, I need to take a closer look at this since cash wheat is trading at a much bigger discount to futures than cash corn, so the ratio may be approaching these very low levels in the physical market.