Ouch!

The things we own fell, the things we're short rose.

The money-manager short CBOT positions peaked around the end of March--at the recent bottom of the wheat market. For the last three weeks, trend-followers have been covering their shorts in fits and starts and today was one of those days. MGE and KC were weighed down because fantastic growing conditions and a stronger USD will lead to a very large US wheat surplus. The CBOT wheat contract was more driven by rallies in other commodities: soybeans, corn, gold, oil...

The hard wheat/soft wheat intermarket spread got crunched in by the most we've seen in the last couple of months: July MGE/CBOT dropped by 5 cents and KC/CBOT by a good 3 cents. We were marginally less hurt because we are positioned out in July 11 and the CBOT contango flattened by a penny or so. We did not add to our strategic position because it's already big enough. We didn't daytrade because I wasn't aggressive enough trying to short the hard wheats against the CBOT early in the day.

It would be nice to say that this is the end of this move, but my estimate is that only 40-50% of the money-manager shorts have been covered. So there could well be more. While I haven't been particularly bearish on wheat while putting on our position, our performance is definitely better on down days in wheat. In the long run, I believe that the intermarket spread values will be driven by relative storage costs and relative value of the protein content whether wheat is $4/bushel or $6/bushel.