By the close, most aspects of the wheat futures were close to unchanged. The front-end contangos steepened: Sep/Dec about 2 cents more premium Dec. The back-end was flatter: Dec/July11 3 cents less premium July11. Intermarket spreads ended near unchanged after an initial move toward continued CBOT strength--the CBOT started the day up 20 cents/bushel, but fell back to a close up less than a nickel.
Overall, the calendar and intermarket spreads have moved back to levels I thought we would never see again on these contracts. At the beginning of March, one of the first calendar trades we did was short Dec10/ long Dec11 at around 80 cents premium Dec11. That premium moved up steadily to well over $1, but has dropped all the way back to 80 cents again. While the intermarket spreads aren't all the way back, Sep MGE/CBOT was available at 25 cents premium MGE today--much closer to the roughly 15 cent premium for the front month we saw in early March than the 75-80 cent premium prevailing in early June.
Not much has changed in the fundamentals of these trades. Demand has been OK. European prices have moved up, taking some pressure off export competition. But inventories of all US varieties of wheat continue to be quite large by historical standards, with no prospect of any shortage through the next US harvest. The VSR regime at the CBOT appears to have solved their cash/convergence problem. It looks like the steep CBOT contango encouraged traders and producers to store CBOT Soft Winter Wheat instead of selling it outright. It's possible his has made KC Hard Winter Wheat relatively less attractive to store and correspondingly more attractive to sell for cash--driving the cash to a large $1.30/bushel discount to KC futures. While the cash/convergence problem may have moved, there is still plenty of cheap cash market wheat available.
Essentially, most of our wheat market variables have been reset to similar values to 4 months ago (unfortunately, including P&L)--I think this represents an opportunity just as good this time around.
**Maybe my posting problems relate to Google Blogger issues--I notice that posts that definitely have 2 comments below, still read "1 comment" below the post. Thanks for the comments BMH.
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Did you see Dec kc traded 58 higher yesterday??? I didn't even notice until one of the guys mentioned it to me.
ReplyDeleteThat's electronic markets for ya I guess.
Talked to some of the more respectable guys here at the CBOT as far as what carry in u/z will trigger z/h. They all said 28 will be the trigger average. Because vsr has already been triggered for u/z so you have to calculate 80% of vsr rate on u/z which is 35.
ReplyDeleteAlso makes sense as we are starting to see tons of liquidity appear around this 28 level.
I didn't see that on the KC.
ReplyDeleteOn the VSR calculations, I will check again--maybe after this heat wave breaks, because I can barely think straight (I trade with all the windows open).
From the CME website:
ReplyDelete"Assume the Jul-Sep spread remains above 80% of financial full carry
and the daily storage charge is triggered to increase to 26.5/100s on July 18, 2010.[This has already happened.] Then, beginning on
July 19, the exchange would begin monitoring the Sep 10 – Dec 10 spread relative to full financial carry.
Assume the 3-month LIBOR rate plus 200 basis points is 2.25 per cent. There are 91 days between
September 1, 2010 and December 1, 2010. Suppose September 2010 Wheat futures are trading at
$4.50 per bushel. Then, financial full carry for the Sep 10 to Dec 10 timeframe would be:
[( 360 $4.50) .00265 ] 26.67 cents
91∗ .0225 ∗ + =
The September – December Wheat spread is measured relative to financial full carry each day from July
19 until August 27, the day the September 2010 Wheat options expire. Suppose during this time the
September – December Wheat spread averaged 25.5 cents, then the spread would be 25.5 / 26.67 =
95.61 percent of full carry. This would trigger an increase in the daily storage rate from 26.5/100s of one
cent per bushel to 36.5/100s of one cent per bushel (approximately 11 cents per bushel per month)
beginning on September 18, 2010."
http://www.cmegroup.com/trading/commodities/grain-and-oilseed/variable-storage-rate.html
So, I think my calculation was very close--the actual financing rate (200 bp over LIBOR) can't be known yet, nor can the price of wheat being financed, but the 80% trigger will be close to 21.5 cents (average from 19July to August 27).
The storage rate is now 0.00265/day, any change to that will only be triggered by the average for U/Z as determined by 27 August for implementation September 18.
While I think 30 cents is too soon to start putting on bull spreads for the post-Goldman roll period, the general idea looks good.