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.