Wheat rallied another 4% today helped by continued gains in corn and a generally positive backdrop for commodities. Over the past few weeks, the wheat:corn price ratio has gone from 1.25 up toward 1.40. Since the only really bullish news has been in the corn market, it shows the impact of the non-commercial traders in grains--corn speculators have been long, while wheat specs have been short until now.
While a rally like this would typically hurt our short, front-end CBOT positions vs MGE wheat and back-month CBOT longs, that was not the case today. The CBOT contango steepened and hard wheat futures outperformed the CBOT. Today we saw the July11 MGE/ CBOT spread at about 5 cents premium for MGE. While it is certainly possible for MGE to trade at a discount to CBOT, at present there does not seem to be any fundamental economic case for that scenario. Eventually, the pressure of the more expensive carry on the CBOT, along with the lower protein content, will have its effect.
Even as the wheat market was up over 20 cents/bushel today, the Sep/Dec CBOT spread went to 29 cents while MGE remains inside of 17 cents. It is unclear to me why the CBOT Dec/July11 spread is still around 50 cents; the same monthly rate as Sep/Dec would put Dec/July11 at 67 to 68 cents. And while there should be less physical wheat to store from Dec to July11, there will be wheat to store and the VSR rate at the CBOT will likely be higher than the rate from Sep to Dec.
If Sep/July11 CBOT spreads move toward $1 bushel and July11 MGE vs CBOT trades at a more reasonable 25 cent premium for MGE, that works out to something more like 75 cents premium for Sep MGE over CBOT (30-31 cents today)--so that's where I see these spreads going.
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Dreyfus was working bearspreads in u10/n11 at 78-78.25 in the pit today
ReplyDeleteSadly, I'm really at my personal limit for calendar spreads. I don't use tight stop/losses; I keep my positions sized so I can stay in the market until I think I'm wrong.
ReplyDeleteThe calendar spreads have not moved much over the past couple of days despite the 30-40 cent rally in the Sep contract. There must be a lot of pressure for the spreads to narrow since there should be a lot of July11 hedgers selling at the current $6+/bushel.