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.