Wheat Harvest Underway

Any prospect of weather concerns for the winter wheat crop are fading fast as Georgia is 20% in, and Texas around 6% done. Wheat again finished at new lows on the CBOT. Spreads were not much changed, though July MGE got as high as 58 cents over CBOT even when the outright market was up on the day--so there was some buying interest there.

The Hard Red Winter Wheat basis remains very weak with cash wheat trading at $1.07 under the KC contract. This is very painful for producers who are not getting the full benefit they would like from their KC hedges. I don't have an explanation for why or how cash Hard Red Winter Wheat is trading at a significant, 28 cent discount to Soft Red Winter Wheat. There is certainly no shortage of Soft, since the CBOT and the KC are both trading at full carries. In fact, you would have to wonder if the higher, VSR storage rates that can be earned on CBOT soft wheat forward hedges are inducing growers to hold back from selling cash soft wheat. In other words, the steep CBOT contango hurts longs that are holding positions on the exchange or physical certificates for exchange delivery, but the steep contango makes it attractive for producers to hold wheat in storage off the exchange.
While the CBOT instituted the VSR regime to force holders of certificates to sell, the impact on hedgers may be the opposite--the VSR induces them to hold Soft Wheat in inventory.

I liquidated the long ethanol/short corn position we had. It was profitable, and could keep going, but I am not comfortable with the short corn side of the trade right here. We added long July MGE/short KC to our long July11 MGE/ short CBOT. These may also be skewed towards working better in a bear market and I don't want a lot of directional bias at the moment.