Specs Covering Shorts in a Down Market?

Why are the CBOT wheat futures falling less than MGE or KC? Could be short-covering from the trend-followers that are short. I dunno.

To put our recent losses in perspective, we lost about 8 cents on the intermarket Sep MGE/KC spread in a market where MGE dropped around 25 cents from the highs vs. the CBOT--our usual benchmark. We are 3-4 cents underwater on our CBOT calendar spreads (Sep/July11 and Dec/July11) on a move where the July10/July11 narrowed by almost 20 cents. So I was wrong on these spreads, but it could have been worse.

At the very front of the market, the July/Sep CBOT spread steepened back to 15 cents premium Sep--so the carry offers a tiny bit of yield in addition to storage costs of 14.5 cents. As we look out the curve, the Sep/Dec spread looks too narrow. As noted, the front July/Sep is at the VSR maximum storage rate; beyond the Sep/Dec, the Dec/March is trading 1-2 cents wider contango than Sep/Dec; since there won't be much new wheat in the fall, the supplies can only be lower in Dec; the implication is that Dec/March is steeper because the VSR maximum is potentially steeper for that period. If there is a belief that Dec/Mar should be steeper than Sep/Dec, then Sep/Dec would have to go to the VSR maximum of about 34 cents (27 today).

Lastly, ethanol is getting very cheap again. Controlling for energy content, nearby ethanol is less than 10 cents/gallon premium to gasoline. I don't believe that premium has gone negative for some time. Considering that by volume ethanol is around 60 cents/gallon cheaper than gasoline and there's a 45 cents/gallon credit to blend it, ethanol consumption should be at the maximum--not to mention exports setting new records. With the BP disaster ongoing, it is hard to see how a higher blend wall, at least to E-12, can be put off much longer.