Dec MGEX Irresistable

Like a moth to a flame, I am drawn back to long Dec MGEX, short CBOT.

Also, while I never did get back into long Oats/ short Corn, I was able to buy Dec/sell March Oats at better than a 9 cent discount for Dec today. The downside on this is about 7 cents and there is little in the way of commodity index rolls or long speculative positions to drive the spread to a big discount for Dec.

Thoughts on MGEX Election?

I would love to hear from members and non-members on the subject of the MGEX Board election.

Flat in Wheat

Well, almost...I've bought a couple of contracts of Dec11 MGEX at a small discount to CBOT. While it seems like the unwinding of speculative positions would hammer the CBOT harder than the MGEX, that hasn't been the case over the past couple of days. Possibly it's because the Dec10 MGEX was almost back to the June highs versus the CBOT--who knows. Should the liquidation by trend-followers intensify, I think the MGEX will strengthen relative to CBOT.
Also, with the cash Spring Wheat at a premium to Soft Red Winter Wheat (70+ cents) and the VSR forcing convergence harder on the CBOT cash/futures basis, the MGEX premium could grow rapidly toward Dec expiration--perhaps up towards $1.00...just an idea.

MGEX Slipping vs CBOT

In spite of a drop in the outright market for wheat, CBOT was the strongest performer of the three wheat futures. Seeing from the open that the market had the potential for a big down day, I tried to be patient and hold my long MGEX/short CBOT position waiting for the trend-followers to dump their CBOT wheat. Didn't happen that way--and in the end I liquidated more of my position though not all.

The price action was very negative for both corn and wheat. Corn started at new highs, but finished down for the day. Dec wheat stayed above $7, but not by much; there was no sign that anyone in the market saw this level as a screaming bargain. With the CFTC COT report showing continued high levels of long positions among trend-followers, this bull market in wheat needs to move forward or we will see some liquidation.

Not Pressing Anymore...

The relentless climb of Dec MGEX vs CBOT halted today. After the debacle this summer, I don't have much appetite for fighting a bull market on the CBOT. So I lobbed out some of my Long MGEX/Short CBOT position today and will pitch the rest out Monday unless there is some change in direction.

While I would like to be selling Dec MGEX at the 75+ cent premium the DTN cash market shows as the premium to cash Soft Red Wheat, it does look attractive to replace the Dec10 MGEX/CBOT spread with Dec11 spreads. Dec11 MGEX continues to trade at a small discount to CBOT.

Cheap Ethanol Getting Cheaper Relative to Corn

Maybe I shouldn't comment on ethanol: I don't much of anything about the physical market, don't know any traders or producers or end-users. I don't know how California regulations affect demand for 2011 and beyond. Don't know what blender credit legislation may or may not be passed before year-end.

A market that is tight enough to be in backwardation for months doesn't seem likely to be the same market that is priced so that producers lose money and shut down. Yet I think that is what we are seeing with October contracts still trading at a premium to the rest of the calendar, while simultaneously the December contract is at the cheapest levels seen in years vs Dec corn.

I'm losing money on this trade, but I still like it.

Pressing Again (Golf Lingo)

Unlike a partner in a round of golf, Mr Market lets you press your bet (increase the wager) at any time. More Dec MGEX wheat/less CBOT.

This is an easy trade in a bear market. The key question is whether MGEX will outpace-- due to export demand-- when the wheat market turns higher.

Bullish News...Grains Struggle

After sharp gains overnight and a generally bullish commodities environment this morning, wheat trended down all day. It seemed like the price action one might expect with a lot of speculative long positions. Perhaps more ominous for bulls, the calendar spreads moved sharply toward contango as well. I'm not reading that much into one day's price action. Dec MGEX continued to strengthen against CBOT--I am rebuilding my long MGEX position there with a small extra gearing to MGEX to help guard against a bull market on the CBOT crushing the MGEX premium. Traded around corn calendar spreads ending up with a long March/short May position --also intended to protect me on a sharp move higher in grains with a limited downside if the outright market falls.

KCBT Moving to Adopt VSR

Thanks to comments from BMH, and no thanks to the KCBT, we know that KCBT's Wheat Contract Committee has recommended moving to a Variable Storage Rate mechanism similar to that on the CME. A google search shows this news conveyed by both National Grain and Feed Associationand grainnet.com--though neither cites a source. I think the grainnet.com summary is not quite correct on the details of the existing CME VSR, and the KCBT plan may change as it goes to the Board and then members for approval, but it looks like it will happen.

I continued to liquidate my Dec MGEX/CBOT wheat spreads as the overall market threatens to burst higher-now down to 50% of previous position. In the cash markets, the Spring Wheat index is pushing up toward 70 cents over Soft Red Wheat, so I am reluctant to exit at these 33-34 cents premiums for Dec MGEX, but it's nice to have more flexibility if the intermarket spread is volatile.

Patience Has Its Limits

After mentioning how patient I've been with the Dec MGEX/CBOT wheat spread, I was happy to let about a third of my position go today at the best levels since the late June surge of CBOT wheat prices. Of course, by keeping 2/3 I'm indicating that I think there are likely higher levels ahead--though not as confidently as before.

While the rallies in corn and cotton look like they are due for at least a correction, the rallies are not confined to ags. With gold making new highs and the dollar trending lower, the overall climate is very bullish for wheat prices. Despite the high levels of non-commercial longs (speculators), I fear another push higher on the CBOT wheat contract. The early August spike over $8/bushel probably marked the highs for many months, but the pain lingers on...

Trading MGEX vs CBOT Wheat

Over the past 6 months, it appears that the biggest factor in the intermarket wheat spreads has been the direction of the outright price of wheat. I'm not really looking for a way to speculate on the outright price. So what I've been looking for is ways to mitigate the effects of "directional" moves in the wheat market on the intermarkets spreads I am holding.

Over the period, the CBOT has clearly been more volatile; the obvious answer then is to underweight the CBOT position vs MGEX. And I've been doing that recently. Less obvious would be to buy a few outright CBOT wheat calls against the CBOT short position.

Another strategy may be to balance intermarket spreads with calendar spreads likely to hedge an adverse move in the outright market. For example, while Dec CBOT is more volatile than Dec MGEX, the Dec MGEX is more volatile than the July CBOT--so a long Dec MGEX position is more neutral against a basket of Dec and July CBOT than against a straight Dec CBOT hedge. At this stage, I find any long front/short back month spreads in CBOT wheat to have too much downside as they move to full carry. My solution, for the moment, is too substitute a long Dec/ short March Corn spread as a general hedge against a spike in grain prices that still has a very small downside.

Too confusing? Poorly thought out? Any comments?

Let's Play Jeopardy!-- Category: Oats Trading

Alex, I'll take Bad Trades for $1000.

After saying I would hold on to my long oats/short corn position, I dumped it on the opening today. Later in the day, I tried to get back as oats and corn traded up, but I never paid up enough.

One place I have been patient is in the long Dec MGEX/ short CBOT trade; both the MGEX and the KC futures continue a pretty steady climb against the CBOT. With the Dec MGEX at a discount to KC, I still like being long the MGEX the best. Cash Spring wheat is trading a full 60 cents over cash Soft Winter Wheat, so the 27 cent Dec MGEX premium to the CBOT still seems conservative.

The Dec ethanol contract looks like a fantastic bull market...but it's not quite keeping pace with Corn. Not losing much, but barely keeping up. I like holding the long Dec ethanol/ short Corn at these levels and would like to hold through the gov't rulings on raising the blend wall to E12 or E15...

Tough to Be a Bear

The latest CFTC COT report shows continued growth in the lopsided long position of trend-followers and indexers alike. And yet, still they buy more.
The demand pull looks good. Supplies not so onerous. Apparently nothing but blue skies and higher prices ahead.

Since my last mention of Oats, they have rallied to around 69% of Corn. I'm holding on for more.

A Link for Nick H

CME Ethanol Outlook Link

The Ethanol Crush is Page 14. Although it isn't labeled as such, the chart appears to be a rolling futures chart with the most recent price drop due to the premium Sep Ethanol contract being replaced by a lower priced new contract and the Sep Corn being replaced by higher priced forward Corn. I made a few comments on this in the Comments section of the previous post.

No Real Surprises on this Wheat Rally

The CBOT outperformed on the upside, but not by a lot. I have added some some "tail hedges" over the last few days; I own a few more MGEX longs than I have CBOT shorts. This pretty much neutralized the adverse intermarket spread move for the day.

In addition to buying Dec/selling Mar in Oats, I have also added a similar spread in Corn. While I'm not enthusiastically bullish about corn (primarily because of the large non-commercial long position), there is so little downside on this calendar spread, I think it is worth a shot.

MGEX Membership Prices

A recent sale of a KCBT membership led me to look at some historical comparisons to the MGEX. Last week, a KC seat traded for $390,000--a price about 2.5% below the September 2008 price and 46% below the all-time highs of Dec 2007. MGEX's last sale was 33% below the prices of September 2008 and fully 72% down from the highs (Feb 2008).

To be fair, the MGEX membership price performance is not much worse than the shares of the CME which are about 28% down from September 2008 and 63% down from the highs. ICE shares performed significantly better, at least recently; they are up 20% since September 2008.

So either the MGEX has been relatively poorly run over the past several years or the seats are dang cheap-take your pick.

**PS. My back-of-the-envelope calculation is that the MGEX would have to start paying a dividend of approximately $6,000/membership to "catch up" to the KCBT seat performance. More realistically, a dividend of $4,000 would provide solid support for membership prices and stop the decay in value.

Back to Full-Time Trading

And greeted with the dullest day in month...

The MGEX Dec futures continue to stay firm relative to the CBOT -- over the last 7 sessions, wheat has rallied about 40-50 cents while the Dec MGEX/CBOT spread has held at about 17 cents premium MGEX.

On the calendar spreads, the futures are pricing in significant changes ahead for wheat--apparently all the wheat in storage is going to be pulled out very rapidly after December (or its owners will happily pay a premium for the privilege of storing it). I am looking at corn, beans, and oats trading at close to full carry for Dec/Mar and I think they are all more attractive than betting on further backwardation in wheat spreads. So far I have only pulled the trigger on a small number of oats spreads, but all look like reasonable protection against a sudden move up in grain prices.

Minneapolis Wheat Upward and Onward

Interesting that the MGEX wheat has outperformed CBOT recently--even on days when the overall market is up. DTN cash index prices have HRS at 60 cents over SRW and there appears to be little export demand for the CBOT product. Dec MGEX at only 21 cents premium still looks like a bargain to me.

Oats Revisited

After the big move up in June due to Canadian weather, Oats have fallen off the radar. The low plantings numbers from Canada caused the trend-following shorts to cover oats well before the Russian drought forced shorts out of every other grain. So for the past several months, Oats have been sliding down in relative value versus Corn. I am an infrequent visitor to Oats and just look to buy them at around 50% of Corn. Since the oat market may be a bit tighter than usual, and since the trend-followers have loaded up on Corn, I've decided to stretch a bit and buy Dec Oats/short Corn today with Oats at 63% of the Corn price. I should do even dollar amounts on each side, but with the small amounts I am executing, I had to buy a little more oats than I shorted in corn.