You Can Feel the Open Interest Shrinking

Ok, maybe not feel it shrinking, but there were no signs of any new appetite for risk in the wheat futures today. The outright prices consolidated after yesterday's tumble. Calendar spreads were unchanged. Intermarket spreads pretty steady too.

We have sold out a quarter of our core hard wheat longs against soft wheat shorts as MGE July has rallied from last week's 28 cent premium to CBOT to around 38 cents premium today. I believe it has further to go, but the smaller position gives us flexibility to re-position on pull-backs and to add calendar spreads that will also perform better in down markets.

One particular area on the calendar that I am watching is July11/Dec11 CBOT wheat. Overall, the CBOT is priced for 1 bump up in VSR that will occur in July10 and no further increases at all--in fact, the CBOT is pricing a drop back to current storage rates from May11 through Dec11. The implication is that the current surplus will be significantly reduced over the next 12 months and that the commodity index longs will not cause a distortion to a fairly balanced market. Both assumptions are looking heroic at the moment.

Ethanol has been slowly appreciating against corn for a few days. The "ethanol crush" is still not good for producers and I still like our long ethanol/short corn position. There are some clouds on the horizon, though; gasoline's rally has fizzled and sugar has lost 10% since we put on our trade.