Some Follow-Through on the USDA Report

The main surprise in the USDA report yesterday was the higher corn consumption/lower ending inventory; today's grain markets seemed to reflect some knock-on effects. While the highlight in corn was the greater usage for ethanol, I think we will see more surprises on consumption. With cattle prices relatively high, there is a lot of incentive to feed cattle longer. In fact, some the hard winter wheat that is trading at over $1 under July futures will also likely end up as animal feed. I got an estimate of 100MM bushels or 5-10% of the hard winter wheat crop potentially being diverted. Similarly, US exports of ethanol (from cheap corn) will set records, easily displacing Brazilian sugar-based product, unless the US raises the blend wall from 10% to at least 12%--either way, more consumption.

So I'm still looking for more bouncing from current levels. If trend-follower short-covering starts to kick in, the buying should mostly be headed to the CBOT. We maintained some of our long CBOT/short KC position and we may add to it, especially on an intra-day basis, if the CBOT rally continues.

In a very interesting development, The CBOT calendar spreads flattened a bit. From a peak of 49+ cents over July, Dec traded down to less than 44 cents over.
But in KC, the spreads stayed pinned to full carry. This is indicates that the extemely weak cash/futures basis is related to whether the futures are at full carry. The carry is larger at the CBOT (July to Dec costs less than 30 cents at KC), but the CBOT is trading at less than 100% of the likely storage fees, while the KC spread is trading at over 130% of storage fees. This set-up seems to lead to a failure of the full carry market to converge at delivery.

Finally, I'm taking a good look at the oat futures--they are pretty cheap vs corn, it's a small crop, and they may have some weather issues in the Canadian growing areas. Really, we should have had it on already, but I would be looking for a relatively large move, 10-15%, on a small position, so the timing doesn't have to be perfect.