Looking More at KC Wheat

Today's trading didn't work out so well. I have been trying to shift away from the short July CBOT/ long anything else strategy that has been driven by the CBOT's VSR regime. As the CBOT contango has grown way beyond KC and MGE, there seems to have been some real impact on grain movement. The VSR was instituted to force the basis back toward zero at the CBOT; the cash/July basis is inside of 50 cents for CBOT wheat after having been over $1 for the previous few years. Meanwhile, it is the KC cash/July basis that has blown out over $1. Cash Hard Red Wheat is trading around 25 cents below Soft Red Wheat.
There may be a number of factors driving the cash market: the supply/demand balance sheet is tighter for soft wheat (small crop, decent exports), and the hard winter wheat market is suffering from some quality issues. Still, there are very few sustained periods of demand for low protein, soft wheat at a premium to higher-protein, hard wheat.
My trading thesis is that the July KC futures premium (about 30 cents over July CBOT) is due to substantial index longs and very few non-commercial shorts--in contrast to the CBOT which continues to attract new trend-follower shorting. This is not a "core" position and we will exit if the KC premium increases to new highs--which is entirely possible if the wheat market continues to head lower. For a down market in outright wheat prices, we are also short KC against MGE. Again, we are only going to sit with this for a few cents against us because if the July KC futures are just becoming unhinged from cash markets, they really could go almost anywhere.