July Oats tacked on another 10% today to make it about a 40% rally in a week. Tough to square with a strong Efficient Markets Hypothesis, since most of the rain was spread over a 6 week period, but there it is. We exited our tiny foray early last night; the idea was to take a small position and hold it, but the market quickly moved to levels where I felt there was too much risk.
The same weather affecting oats is impacting Hard Spring Wheat as well; July MGE stayed up around 70 cents over CBOT. We put on a new long July MGE/ short KC position (43 cents premium MGE), while adding to our long July CBOT/ short KC position (26+ cents premium KC). The Minneapolis long is a bet on further movement from the Canadian wet weather--the protein premium for Hard Spring Wheat should increase. The CBOT long is a bet on short-covering from trend-followers eventually pushing up CBOT relative to the other markets. Clearly, we could be hurt by strength in KC, but that should be weighed down by weakness in cash Hard Winter Wheat and doesn't have a large non-commercial short interest.
Lastly, we have a small long Dec Ethanol/short Corn position. Ethanol inventories remain rather tight with the market in backwardation through October and carries less than storage through January. ADM has apparently lobbied hard for an increase in the 10% blend wall--even if only to 12% instead of 15%. Currently the ethanol "crush" vs corn is only a bit over 25 cents/gallon in Dec--around the year's lows.
[Crush=Ethanol-(Corn/2.8) A more accurate version includes the benefit from DDGs sold for livestock feed, but gives similar results.]
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