Grains Flop First

Grains opened higher, presumably in sympathy with higher commodities and equities on the back of the Chinese Yuan news, and immediately headed back lower. The action in intermarket spreads and calendar spreads was mixed. We were able to add to our CBOT short Dec10/ long July11 spreads at close to the lowest premium levels for July11 seen for weeks.

At the front end of the market, July/Sep MGE spreads were trading very close to exchange storage costs and the rest of the MGE forward curve is at lower premiums than storage, so that would be the "tightest" market. As far as the CBOT vs KC forwards, it is like the tale of the Walrus and the Carpenter; the CBOT forward premiums are bigger, but the KC forwards are the most premium beyond exchange storage costs.

In general, exchange storage costs are below third-party, open-market storage fees. The last survey I saw pegged average "real" storage costs at about 7.5 cents/bushel/month, while the KC charges 4.5 cents, MGE charges 5 cents, and the CBOT will go to 8 cents starting July 19 and likely up to 11 cents in September. The VSR rules allow storage rates to rise 3 cents/month every expiration where the nearby spread is trading over 80% of the then current "full carry" (storage plus interest). It is possible, therefore, that storage fees will rise to 14 cents/month in December and more in March, and then May.... Eventually, it will be economic to move the grain out of CBOT elevators or something else will give, but there is still room for steeper CBOT contangos. While Sep/Dec should top out around 34 cents (currently 30), Dec10/July11 isn't capped until around 115-120 cents (currently 62). I expect the real storage and transport economics to keep the Dec10/July11 inside of that VSR maximum, but there could still be quite a bit of room to move.