I've been aware of the very weak Hard Winter Wheat cash price for a while. As people often do, I was content to ignore it--in part because it didn't fit my already-in-progress trading strategy. I'm still not sure how to interpret it.
The cash basis for Soft Winter Wheat was very weak for years (which is why the CBOT instituted the VSR regime), and it was primarily a signal that the futures had become unhinged from the cash market. In other words, the weak basis was the result of a futures market that was able to climb ever higher--the weak basis was not a signal to sell the related futures.
Now we have a situation where the KC wheat contract is the cheapest place to carry wheat inventory. The KC calendar spreads are at full carry for as far out as they are listed-several crop cycles. Is KC going to experience the same weak cash basis as the CBOT before VSR? The cash basis for Soft Winter Wheat is now about 57 cents under July CBOT, while cash Hard Winter Wheat is about $1.08 under July KC.
I don't think that's exactly what's going on. But this KC basis is creating some interesting situations. For example, the big discount for cash wheat means that cash Hard Winter Wheat is already down to 1.15X cash corn. There shouldn't be a whole lot of downside from there. The MGE has contracts for cash indexes on all the major wheat markets and corn and beans, but the only contract that trades is the index on Soft Winter Wheat (due to last year's big basis swings).
I'm continuing to investigate...
Friday, May 28, 2010
Thursday, May 27, 2010
Leaving the Party ...Again
It is easy to get complacent sitting with a winning position. It's also easy to exit a good trade and fail to get back in....
Wheat rallied about 2% today; nothing special in the context of the sharper weaker USD and strong equities and commodities across the board. The hard wheat vs soft wheat premiums stayed close to the highest levels of the year and we took the opportunity to reduce risk. We closed out most of our calendar spreads and all the hard vs soft wheat spreads.
I rejiggered our intermarket exposure so that we have a long MGE/short KC position in July10. Recently, I have kept to MGE for long hard wheat exposure because I don't really understand why the cash basis for Hard Red Winter Wheat (KC) is so weak. The index of hard winter wheat (published by DTN) is over 20 cents below the cash soft winter wheat index and over $1 below the July KC futures. I'm not saying the cash basis is a leading indicator of intermarket futures spreads, but such a large basis has a very negative impact on hedgers and will attract some notice...
Wheat rallied about 2% today; nothing special in the context of the sharper weaker USD and strong equities and commodities across the board. The hard wheat vs soft wheat premiums stayed close to the highest levels of the year and we took the opportunity to reduce risk. We closed out most of our calendar spreads and all the hard vs soft wheat spreads.
I rejiggered our intermarket exposure so that we have a long MGE/short KC position in July10. Recently, I have kept to MGE for long hard wheat exposure because I don't really understand why the cash basis for Hard Red Winter Wheat (KC) is so weak. The index of hard winter wheat (published by DTN) is over 20 cents below the cash soft winter wheat index and over $1 below the July KC futures. I'm not saying the cash basis is a leading indicator of intermarket futures spreads, but such a large basis has a very negative impact on hedgers and will attract some notice...
Wednesday, May 26, 2010
Wheat Still Pinned to the Floor
Outright July CBOT wheat edged up about a penny today, but lost ground against MGE wheat, KC wheat, corn and just about everything else in the commodities world. We cut back our risk on intermarket MGE vs CBOT because the levels are pretty good: July MGE is about 47+ cents over CBOT.
As we look out on the forward curve, July11 MGE vs CBOT is much less volatile than July10-and much cheaper. Since March 1, the July11 intermarket spread has rallied from -10 cents to today's high of +5 cents, while July10 has gone from +10 to +47. The difference is that July10/July11 calendar spreads on MGE haven't moved much from 65 prem July11, while CBOT July10/July 11 has gone from about 88 cents premium July11 to 112 premium.
While I think the long-term average premium for MGE over CBOT is not too far from current July10 47 cents levels, we can remain comfortably long MGE as long as forward MGE is very cheap (like close to even) compared to CBOT and, crucially, the CBOT contango can be relied upon to be firm. As July10/July11 CBOT steepens to 120 and beyond, we will have to get more cautious, since it will pay to move wheat out of CBOT elevators and into cheaper storage and the contango will no longer be a one-way trade.
As we look out on the forward curve, July11 MGE vs CBOT is much less volatile than July10-and much cheaper. Since March 1, the July11 intermarket spread has rallied from -10 cents to today's high of +5 cents, while July10 has gone from +10 to +47. The difference is that July10/July11 calendar spreads on MGE haven't moved much from 65 prem July11, while CBOT July10/July 11 has gone from about 88 cents premium July11 to 112 premium.
While I think the long-term average premium for MGE over CBOT is not too far from current July10 47 cents levels, we can remain comfortably long MGE as long as forward MGE is very cheap (like close to even) compared to CBOT and, crucially, the CBOT contango can be relied upon to be firm. As July10/July11 CBOT steepens to 120 and beyond, we will have to get more cautious, since it will pay to move wheat out of CBOT elevators and into cheaper storage and the contango will no longer be a one-way trade.
Tuesday, May 25, 2010
No Miracle Close Here...
Strong USD, higher interest rates, good weather...nothing remotely bullish for wheat in today's news. After holding KC July10/July11 spreads for some time now at full carry (around 3-3.25% yield with delivery/re-tender), I pitched that position out. Too much risk of higher financing rates, too much much risk of a storage rate change, too long at the price to be considered a bargain.
I put on a new long ethanol/short corn spread. Ethanol margins are back close to 6 month lows--close to breakeven for most producers-so not much incentive to bring on new capacity. At he same time, the calendar spreads for ethanol indicate tighter inventories--the curve is almost flat from July to December. There is a possibility the blend wall (maximum ethanol mix) will be raised from 10% at some point this summer. Even with gasoline down almost 20% in a month, it is still very profitable to blend as much $1.60/gallon ethanol as possible into that gasoline. Since there is a lot of uncertainty around the likelihood and timing of a blend wall increase, I think it will have a very positive impact on ethanol prices should it come to pass. Even if the limit stays at 10%, US corn-based ethanol is still economic vs sugar-based Brazilian product, so exports should continue and imports will be almost nil.
I put on a new long ethanol/short corn spread. Ethanol margins are back close to 6 month lows--close to breakeven for most producers-so not much incentive to bring on new capacity. At he same time, the calendar spreads for ethanol indicate tighter inventories--the curve is almost flat from July to December. There is a possibility the blend wall (maximum ethanol mix) will be raised from 10% at some point this summer. Even with gasoline down almost 20% in a month, it is still very profitable to blend as much $1.60/gallon ethanol as possible into that gasoline. Since there is a lot of uncertainty around the likelihood and timing of a blend wall increase, I think it will have a very positive impact on ethanol prices should it come to pass. Even if the limit stays at 10%, US corn-based ethanol is still economic vs sugar-based Brazilian product, so exports should continue and imports will be almost nil.
Monday, May 24, 2010
Commercial Buying Here?
Most observers looking at wheat are commenting along the lines of "spec short-covering supports wheat..."--much as I have been. It was a surprise to see in the CFTC COT reportthat it was commercial buying, at least through last Tuesday, supporting the market. In wheat (and corn), speculators were indeed shorting the grains as the USD rose--but commercial interests were covering, reducing their shorts. Hmmm, worth thinking about.
Wheat does continue to slide vs corn; the ratio is down to 1.26:1. Usually substitution is considered economic around 1.15-1.10:1, but some of the corn inventory is very poor and there could be support a little before those levels.
While I am trying to stay open-minded to supporting factors to the CBOT wheat market, we added to our long July MGE/short CBOT position today. CBOT calendar spreads steepened back close to the widest levels yet and I believe that may be a harbinger of new highs on the MGE/CBOT spread.
Wheat does continue to slide vs corn; the ratio is down to 1.26:1. Usually substitution is considered economic around 1.15-1.10:1, but some of the corn inventory is very poor and there could be support a little before those levels.
While I am trying to stay open-minded to supporting factors to the CBOT wheat market, we added to our long July MGE/short CBOT position today. CBOT calendar spreads steepened back close to the widest levels yet and I believe that may be a harbinger of new highs on the MGE/CBOT spread.
Friday, May 21, 2010
Fresh Look at the Market
It actually looks a lot like the old market. So we'll start to put on the same sort of trades. Today we bought a little bit of July Minneapolis vs CBOT. We shifted the old Minneapolis vs CBOT to MGE vs KC. Warily, we are looking to get back in. Nothing new enticing in the calendar spreads.
We may get a further steepening of contango on the CBOT at the very front end over the next few weeks: non-commercial players no longer offset much of the index rolls. So the indexers will have to roll against the hard-ball playing commercial longs. Also, the VSR rules change included new limits on financial carries--carrying without "load out"--which may limit the appetite and ability for a relatively small number of commercials to accommodate the index rolls.
We may get a further steepening of contango on the CBOT at the very front end over the next few weeks: non-commercial players no longer offset much of the index rolls. So the indexers will have to roll against the hard-ball playing commercial longs. Also, the VSR rules change included new limits on financial carries--carrying without "load out"--which may limit the appetite and ability for a relatively small number of commercials to accommodate the index rolls.
Thursday, May 20, 2010
Leaving before the Party's Over
We took off 75% of our intermarket risk and 100% of our CBOT calendar spreads. We kept the KC July10/July11 calendar spread which is at full carry.
Unsurprisingly, the wheat market headed lower from the open with all the other commodities and equities...but it didn't go far, and soon enough we were back at unchanged. Buying was strongest in KC and MGE with those markets up 1 or 2 cents for most of the day. Though I try not to predict the unpredictable, i.e. turns in the market, fear (or caution) drove me to cover at attractive, not-at-all painful levels.
We'll take a fresh look at the market tomorrow.
Unsurprisingly, the wheat market headed lower from the open with all the other commodities and equities...but it didn't go far, and soon enough we were back at unchanged. Buying was strongest in KC and MGE with those markets up 1 or 2 cents for most of the day. Though I try not to predict the unpredictable, i.e. turns in the market, fear (or caution) drove me to cover at attractive, not-at-all painful levels.
We'll take a fresh look at the market tomorrow.
Wednesday, May 19, 2010
We Wait for Wheat to Wilt
Wheat spreads and outright prices covered pretty much the same ground as Monday and Tuesday. Since outright prices are at recent lows and within a dime of contract lows, and CBOT calendar spread prices reflect the steepest levels of contango in recorded history, I would characterize this as a consolidation--likely to be followed by more bear market action for wheat prices and related spreads. No bullish news has surfaced in wheat; weather news is pointing to a large, healthy crop.
Macro factors do not seem to be having much impact on the wheat market. Wheat is not responding to moves in the USD. There doesn't seem to be any chatter regarding potential impact from banking reforms. Analysts' estimates of wheat consumption have not been impacted by fresh prospects of a double-dip recession. Generally speaking, all of these factors would be fresh negatives for wheat, but, so far, there is little interest from speculators in shorting wheat at current levels.
Macro factors do not seem to be having much impact on the wheat market. Wheat is not responding to moves in the USD. There doesn't seem to be any chatter regarding potential impact from banking reforms. Analysts' estimates of wheat consumption have not been impacted by fresh prospects of a double-dip recession. Generally speaking, all of these factors would be fresh negatives for wheat, but, so far, there is little interest from speculators in shorting wheat at current levels.
Tuesday, May 18, 2010
Adding Here, Reducing There...
A couple of days ago we were adding to our CBOT short July11/long Dec11 calendar spread position, today we took some off. We have been taking off intermarket hard wheat vs soft wheat spreads, today we added some long MGE/ short CBOT exposure. I don't think these are random adjustments, though it is hard to say how much value is being added.
The CBOT forward curve and the hard wheat vs soft wheat spread are moving together in response to directional moves in the outright wheat market. Being long MGE and KC vs short CBOT has had a very similar risk to betting on a steeper CBOT contango; they are both bear market spreads in this environment. So I try to limit the aggregate exposure we have across the two, intermarket spreads and calendar spreads. This results in days like today where we were able to add to the intermarket July10 MGE vs CBOT position at recent levels (43-44 cents premium MGE), while reducing the July11/Dec11 exposure at a 3-4 cent profit from last week (selling Dec11 at 32 cents premium)--even though I think the July11/Dec11 premium will continue to climb and I am not suddenly more bullish on MGE wheat vs the CBOT. I try to take what the market gives us on any given day.
The long ethanol/short gasoline trade we attempted last month was "one that got away." I had the right fundamental view on valuation, but did not properly size the risk and lost patience. My thinking was that we could be wrong for 5%, but not 10%. However, I found out that I couldn't tolerate even a 3-5% move without looking for the exit. A missed opportunity.
The CBOT forward curve and the hard wheat vs soft wheat spread are moving together in response to directional moves in the outright wheat market. Being long MGE and KC vs short CBOT has had a very similar risk to betting on a steeper CBOT contango; they are both bear market spreads in this environment. So I try to limit the aggregate exposure we have across the two, intermarket spreads and calendar spreads. This results in days like today where we were able to add to the intermarket July10 MGE vs CBOT position at recent levels (43-44 cents premium MGE), while reducing the July11/Dec11 exposure at a 3-4 cent profit from last week (selling Dec11 at 32 cents premium)--even though I think the July11/Dec11 premium will continue to climb and I am not suddenly more bullish on MGE wheat vs the CBOT. I try to take what the market gives us on any given day.
The long ethanol/short gasoline trade we attempted last month was "one that got away." I had the right fundamental view on valuation, but did not properly size the risk and lost patience. My thinking was that we could be wrong for 5%, but not 10%. However, I found out that I couldn't tolerate even a 3-5% move without looking for the exit. A missed opportunity.
Monday, May 17, 2010
Wheat Supplies Weigh on Calendar Spreads
The combination of a stronger USD and plentiful wheat supplies remains the driving force pushing the CBOT calendar spreads to steeper contangos. We are positioned for that, though not aggressively.
The above combination did not drive CBOT wheat to contract lows. Even though the lows are within striking distance and every possible bearish factor is in place, there was apparently little interest in establishing new speculative shorts at these levels. Last week's CFTC COT report showed an increased in passive commodity index long positions and some short-covering from trend-followers; this was offset by commercial selling. That's not a bullish story either.
So far, the view that the wheat markets are over-supplied and going to full carry (and staying at full carry for a long time) is still consistent with all the observed data. I expect wheat to continue to trade down toward 1.1-1.2X corn before bottoming (currently 1.3X). Protein premiums should grow in this environment: hard wheat will continue to outperform soft wheat.
The above combination did not drive CBOT wheat to contract lows. Even though the lows are within striking distance and every possible bearish factor is in place, there was apparently little interest in establishing new speculative shorts at these levels. Last week's CFTC COT report showed an increased in passive commodity index long positions and some short-covering from trend-followers; this was offset by commercial selling. That's not a bullish story either.
So far, the view that the wheat markets are over-supplied and going to full carry (and staying at full carry for a long time) is still consistent with all the observed data. I expect wheat to continue to trade down toward 1.1-1.2X corn before bottoming (currently 1.3X). Protein premiums should grow in this environment: hard wheat will continue to outperform soft wheat.
Friday, May 14, 2010
Some Bullish Factors in Grain
At current levels, China is buying US corn. At current cattle and hog prices, it is very profitable to feed livestock--and then feed them even more and deliver them heavy. With current gasoline (and sugar) prices and current tax credits, corn-based ethanol is the most economic fuel available--without the tax credits, corn-based ethanol is still within a few percent of gasoline in cost efficiency (and there's no corn slick in the Gulf of Mexico).
Ok, these are all about corn, and wheat is about 10-20% percent above the levels where it could be directly substituted. Still, that somewhat limits the downside for wheat, as do the farming economics which make wheat the least profitable grain to grow with today's relative prices. We should expect to see wheat acreage continue to shrink next year.
So even though most of our trades are looking great today, things can change. We took off some of our intermarket MGE and KC vs CBOT spreads today. Both are indeed pushing to new highs--higher premiums for the MGE and KC. We added to our risk on the CBOT and KC calendar spreads, though in different directions. On the CBOT we continue to look for steeper contangos, while on the KC I believe that we are very close to full carry and the spreads will not widen any more.
It's not rocket science: July10/Dec10 CBOT is 48 cents (full VSR carry is about 51), while the KCBT July10/Dec10 is about 29.5 (full carry is 29.5). But when we look at 2011, we see July11/Dec11 CBOT is about 28.5, while the KCBT traded out to 30.
Ok, these are all about corn, and wheat is about 10-20% percent above the levels where it could be directly substituted. Still, that somewhat limits the downside for wheat, as do the farming economics which make wheat the least profitable grain to grow with today's relative prices. We should expect to see wheat acreage continue to shrink next year.
So even though most of our trades are looking great today, things can change. We took off some of our intermarket MGE and KC vs CBOT spreads today. Both are indeed pushing to new highs--higher premiums for the MGE and KC. We added to our risk on the CBOT and KC calendar spreads, though in different directions. On the CBOT we continue to look for steeper contangos, while on the KC I believe that we are very close to full carry and the spreads will not widen any more.
It's not rocket science: July10/Dec10 CBOT is 48 cents (full VSR carry is about 51), while the KCBT July10/Dec10 is about 29.5 (full carry is 29.5). But when we look at 2011, we see July11/Dec11 CBOT is about 28.5, while the KCBT traded out to 30.
Thursday, May 13, 2010
USDA Report Sinks In
Wheat prices have been moving sideways on the charts for the last few months. The bearish inventory fundamentals have long been in evidence. However, over that time period the USD has strengthened substantially, undermining the price stability at these levels. Yesterday's USDA report has made the inventory backdrop appear even worse than assumed, since the main new area of building stockpiles is China. Yes, that same China that can't get enough oil or copper or palladium apparently grows more wheat than it can eat. As does India. Uh oh.
The nearby spreads on the CBOT continue to push toward the VSR maximums, but our July11/Dec11 spreads did not reflect any of this oversupply news. Nor did the CBOT fall a lot more than MGE or KC--both disappointing developments.
Just for laughs, if you want to see Nobel Prize-winner Paul Krugman get it all wrong, here is a link to his "Grains Gone Wild" column from 2 years ago. They still eat meat in China, we use more ethanol than ever, and global warming continues, but grains have not gone wild...grain prices are much, much lower than 2 years ago.
The nearby spreads on the CBOT continue to push toward the VSR maximums, but our July11/Dec11 spreads did not reflect any of this oversupply news. Nor did the CBOT fall a lot more than MGE or KC--both disappointing developments.
Just for laughs, if you want to see Nobel Prize-winner Paul Krugman get it all wrong, here is a link to his "Grains Gone Wild" column from 2 years ago. They still eat meat in China, we use more ethanol than ever, and global warming continues, but grains have not gone wild...grain prices are much, much lower than 2 years ago.
Wednesday, May 12, 2010
More Contrary Wheat Price Action
Reports of Chinese corn buying, along with higher gold and bullish equity markets gave wheat futures a lift to the upside for the first 15 minutes of trading today. Then reality set in. Wheat pulled back to unchanged and then 1/2-1% lower. All the bullish noises in the background can't counteract the strongly negative effects of a higher USD and big wheat inventories waiting for export.
Part of the hard wheat vs soft wheat gains we had yesterday were given back, but not all. July MGE is 36-38 cents over CBOT and July KC has about a 15 cent premium to CBOT. These spreads are both within a nickel of the highest levels in many months. With a substantial number of the trend-followers now out of their short CBOT positions, I am looking for CBOT weakness to resume and for these spreads to make new highs.
Part of the hard wheat vs soft wheat gains we had yesterday were given back, but not all. July MGE is 36-38 cents over CBOT and July KC has about a 15 cent premium to CBOT. These spreads are both within a nickel of the highest levels in many months. With a substantial number of the trend-followers now out of their short CBOT positions, I am looking for CBOT weakness to resume and for these spreads to make new highs.
Tuesday, May 11, 2010
USDA Report Drives Wheat to...Unchanged
No surprises in today's USDA numbers. Wheat acres planted are down from last year, but the weather has been good and the crop looks good and inventories remain large. The short July/long Dec we entered a few days ago at 42 cents premium Dec is now 46.5 premium Dec.--we took some profit (since it won't go too much over 51) and added some short July11/long Dec11 at 28.50 cents premium Dec11.
This 2011 spread is a bet on the new crop after this new crop, and so is significantly more speculative. For 2010's July/Dec, almost any crop plus current inventory will put the spread out to the new VSR full carry. For the 2011 spread, we actually need the inventories to stay large for quite a bit longer. Of course, the pricing reflects the uncertainty and I believe that when the 11 cents/month VSR charges come into view in 2010, we will see the back months respond. Many market participants seem unaware of the new VSR rules.
For reasons unknown, hard wheat strengthened against soft wheat today with Minneapolis (MGE) up a nickel and KC also up a penny or two.
This 2011 spread is a bet on the new crop after this new crop, and so is significantly more speculative. For 2010's July/Dec, almost any crop plus current inventory will put the spread out to the new VSR full carry. For the 2011 spread, we actually need the inventories to stay large for quite a bit longer. Of course, the pricing reflects the uncertainty and I believe that when the 11 cents/month VSR charges come into view in 2010, we will see the back months respond. Many market participants seem unaware of the new VSR rules.
For reasons unknown, hard wheat strengthened against soft wheat today with Minneapolis (MGE) up a nickel and KC also up a penny or two.
Monday, May 10, 2010
No Bailout for Wheat
Wheat markets never got any euro-phoria going today. Without support at the CBOT from the trend-followers covering their shorts, wheat there dropped about 3% with MGE and KC falling about 2% each.
A review of the CFTC COT report shows the managed-money sector approaching a flat net position. If the upward pressure on the dollar continues and the wheat market no longer has support from non-commercial shorts, the wheat market will trade back toward the April lows--hopefully with the hard wheat premiums for KC and MGE stretching out toward their highs.
We took off a small amount of our long hard/short soft wheat positions today--always nice to have more flexibility.
A review of the CFTC COT report shows the managed-money sector approaching a flat net position. If the upward pressure on the dollar continues and the wheat market no longer has support from non-commercial shorts, the wheat market will trade back toward the April lows--hopefully with the hard wheat premiums for KC and MGE stretching out toward their highs.
We took off a small amount of our long hard/short soft wheat positions today--always nice to have more flexibility.
Friday, May 7, 2010
No Insights; No Opportunities; No Trading
Similar wheat market action to the previous couple of days, but everything ended very little changed today.
Thursday, May 6, 2010
Liquidation Dynamics Continue in Wheat
Same recap as yesterday. Trend-following money managers liquidate their front-end of the market CBOT wheat shorts--pushing July CBOT higher against December and further back months and higher against MGE and KC wheat futures. We took the opportunity to add to our calendar spread exposure on CBOT wheat: short the front, long the back months.
News developments continue to be negative for wheat. India may wait until fall to make a decision, but they are considering allowing exports of wheat, which has been banned since 2007. Storage capacity is reported to be completely full in India, with a significant amount being stored in the open.
Needless to say, the strength of the USD will not help US exporters of wheat. Once again, I expect that the CFTC COT report will show that commercial sellers have replaced a good portion of the non-commercial shorts at current levels.
News developments continue to be negative for wheat. India may wait until fall to make a decision, but they are considering allowing exports of wheat, which has been banned since 2007. Storage capacity is reported to be completely full in India, with a significant amount being stored in the open.
Needless to say, the strength of the USD will not help US exporters of wheat. Once again, I expect that the CFTC COT report will show that commercial sellers have replaced a good portion of the non-commercial shorts at current levels.
Wednesday, May 5, 2010
Trend-Following Shorts Continue to Exit Wheat
In addition to pushing the CBOT wheat contract up toward MGE and KC wheat, short-covering on the CBOT also usually flattens the CBOT wheat contango. We took advantage of that by add some calendar exposure on the CBOT: short July/ long Dec at 42 cents premium December.
On a historical basis 42 cents is a pretty bad level for us to get in--it's just about full carry. The key for us is that the new VSR regime upsets the traditional valuation. Potentially, the storage charges for receipts that are not "loaded out" could go to 8 cents/month in July and then 11 cents/month in September...the full carry for holders of wheat certificates from July through December could approach 51 cents. That's the new VSR cost if July/Sep stays over 10 cents (now 15 cents) and Sep/Dec stays over 23 cents (now 27 cents). Even if Sep/Dec were to narrow to 15-23 cents, the VSR rate for July/Dec would still be almost 45 cents.
While any number of things could go wrong with our short July/ long Dec CBOT spread, developments so far point to a maximum VSR full carry rate as the end point. The strong dollar will continue to inhibit US exports and all signs point to a large US crop to add to already large inventories.
On a historical basis 42 cents is a pretty bad level for us to get in--it's just about full carry. The key for us is that the new VSR regime upsets the traditional valuation. Potentially, the storage charges for receipts that are not "loaded out" could go to 8 cents/month in July and then 11 cents/month in September...the full carry for holders of wheat certificates from July through December could approach 51 cents. That's the new VSR cost if July/Sep stays over 10 cents (now 15 cents) and Sep/Dec stays over 23 cents (now 27 cents). Even if Sep/Dec were to narrow to 15-23 cents, the VSR rate for July/Dec would still be almost 45 cents.
While any number of things could go wrong with our short July/ long Dec CBOT spread, developments so far point to a maximum VSR full carry rate as the end point. The strong dollar will continue to inhibit US exports and all signs point to a large US crop to add to already large inventories.
Tuesday, May 4, 2010
Speculators Cut Back on Risk, Wheat Goes Higher
As one of the few commodities where the managed-money crowd is short, wheat seems very contrary --moving 2% higher on the day, after opening down 1%. There isn't any bullish news. Good weather, strong dollar, stiff export competition: all bearish.
For the past few days we have been waiting for a chance to get back into our long MGE and KC/ short CBOT position; today we stopped waiting for the perfect opportunity. While the intermarket spreads continue to be affected by day-to-day outright price movement, the bigger picture shows a trend toward stronger premiums for MGE and KC over CBOT.
The outright market may or may not continue to rally on trend-follower short covering, but I don't feel that flat is the right answer at this point. After peaking at 20 cents over CBOT we bought July KC at 11-12.5 over CBOT today; after trading as high as around 40 cents over CBOT, we bought July MGE at 31.5-34.5 over CBOT today.
Yesterday I said we would wait and see on the outright ethanol. We dumped it today.
For the past few days we have been waiting for a chance to get back into our long MGE and KC/ short CBOT position; today we stopped waiting for the perfect opportunity. While the intermarket spreads continue to be affected by day-to-day outright price movement, the bigger picture shows a trend toward stronger premiums for MGE and KC over CBOT.
The outright market may or may not continue to rally on trend-follower short covering, but I don't feel that flat is the right answer at this point. After peaking at 20 cents over CBOT we bought July KC at 11-12.5 over CBOT today; after trading as high as around 40 cents over CBOT, we bought July MGE at 31.5-34.5 over CBOT today.
Yesterday I said we would wait and see on the outright ethanol. We dumped it today.
Monday, May 3, 2010
Lack of Conviction Stymies Westchester Wheat Trader
I sat here watching the hard wheats, MGE and KC, strengthen vs CBOT wheat for the first 80% of the day--typical down day with CBOT down the most of the three. Both MGE and KC strengthened to a bit over the levels where we exited last week, causing me some anxiety about the difficulty of re-entering at worse levels. Then the markets turned, rallied the last half hour, and closed near unchanged with the hard/soft spreads at the smallest premiums of the day. So...no harm done by being out of the market today.
In addition to my concern that CBOT wheat will rally fastest in an up market-particularly a bull market driven by inflation fear/excess liquidity- I have been puzzling about the impact of the BP oil spill on grain movements. I made a sarcastic comment in April on how there was a limit to the discount for KC wheat as long as the Mississippi kept flowing to carry the wheat for export; while I haven't seen any news to indicate port closures, I have to wonder if traffic won't be significantly affected at some point. Finally, I don't know how reduced Gulf of Mexico shipments would affect the intermarket wheat spreads.
We have had an outright long position in ethanol for a couple of days. Ethanol is very, very cheap against gasoline, but I don't want to short gasoline against it. It is pretty cheap against corn too, but I don't want to bet a lot on margins improving there. So we'll just hold the ethanol and see what happens in corn and gasoline. May/June ethanol futures did trade out to a full carry last week, but have since tightened to inside the cost of storage, perhaps indicating a bit of real demand.
In addition to my concern that CBOT wheat will rally fastest in an up market-particularly a bull market driven by inflation fear/excess liquidity- I have been puzzling about the impact of the BP oil spill on grain movements. I made a sarcastic comment in April on how there was a limit to the discount for KC wheat as long as the Mississippi kept flowing to carry the wheat for export; while I haven't seen any news to indicate port closures, I have to wonder if traffic won't be significantly affected at some point. Finally, I don't know how reduced Gulf of Mexico shipments would affect the intermarket wheat spreads.
We have had an outright long position in ethanol for a couple of days. Ethanol is very, very cheap against gasoline, but I don't want to short gasoline against it. It is pretty cheap against corn too, but I don't want to bet a lot on margins improving there. So we'll just hold the ethanol and see what happens in corn and gasoline. May/June ethanol futures did trade out to a full carry last week, but have since tightened to inside the cost of storage, perhaps indicating a bit of real demand.
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