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.