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.