Some Thoughts about Timing

Through this tremendous rally in wheat prices, I have been managing strategies that seem better suited to bear markets. First, I have been buying Minneapolis and KC wheat futures vs shorting CBOT futures on the theory that commodity index buying pushes the CBOT higher than commercial values will support. Second, I have shorted nearby CBOT futures vs buying more distant contracts on the theory that with a sufficient current wheat inventory, the commodity index rolls will consistently push the calendar spreads toward full carry (or better, the VSR maximum).

As the market has rallied, ostensibly on the news of lower production from non-US sources, both strategies have suffered significant losses. I chose to reduce risk by eliminating positions on the calendar spreads, because on the slim chance that the Russian drought has a significant impact on supplies, the calendar spreads should be directly affected. I kept the long MGE, short CBOT spreads because it's not clear why a general shortage of wheat would cause buyers to prefer low-protein to high-protein. Sure speculators may flock to the CBOT contract initially, but the real commercial value of the CBOT product would not be positively affected.

Just to reassure myself, I went back to look at the big rally from a couple of years ago that sent MGE over $20/bushel--surely that would cheer me up. Nope. Not only did the wheat price rally initially send CBOT to a premium to MGE, it sent the CBOT to the biggest premium over MGE seen in many, many years--and this just before MGE skyrocketed. So if you had the "right" view on MGE going up vs CBOT, first you had to withstand a drop to record lows. Obviously, not many participants could...it's a very humbling picture.