Hard Wheat Strength

Late this week, both MGEX and KCBT Dec Wheat futures closed at the best levels of the year with the exception of one day, the August 5 spike. The CBOT wheat finished around its average level for the period since August 5. So the MGEX is pushing 60 cents premium to CBOT while KC is over 50 cents premium. I like it and I think KC and MGEX especially will continue to outperform the CBOT.

If we look out to Dec11, we see MGEX wheat priced at even with to CBOT and KC at a discount--does anyone really think that is how they will settle in a year's time? No. That's where the high VSR charges force the forward curve. I'm happy to buy the hard wheat futures vs CBOT and wait.

No Trading Today

MGEX wheat was the best performer on a continuation of the wheat rally. Commercial demand? Noise? Who knows...

No shortage looming for Dec CBOT as that stayed a full 39 cents under March. Correct me if I'm wrong, but all the grains from Corn to Wheat to Oats are at 80%+ of full carry. This is a striking contrast to markets like sugar, cotton, cocoa, ethanol, gasoline, milk... Taking corn as an example, I think bulls can take comfort in the low stocks/use ratio and attribute the nearby spreads to a function of the US (vs world) harvest and storage situation and pin hopes on the shape of the more deferred futures curves which bends towards backwardation.

Outside of the wheat market, next week's Federal Reserve actions/announcements could have a big impact on all commodities. Personally, I can't imagine a Fed Chairman whose entire career is built on the idea of expansionary monetary policy disappointing markets on the scale of QE2. Should investors rush into commodities, we could see CBOT gaining more than the less actively traded KC and MGEX--just something to bear in mind.

Rolling to March

I am happily rolling Dec MGEX longs and Dec CBOT shorts to March. Maybe I should hang in for another week or two, but with the CBOT Dec at 39 cents under March, there's only a couple more cents there at best. The March11 MGEX is around 30 cents premium to CBOT; no surprise that I think that's a bargain with the Dec at 54-55 cents premium and cash Spring Wheat at around 90 cents premium to Soft Winter Red Wheat.

Yesterday, I bought March/sold May in Corn. I figure there's only 6-7 cents downside and these spreads may come in handy if (when) grains spike to new highs. I will be on the lookout to buy March/sell May in Oats if I can get that close to 10 cents discount for March.

Not Such a Great Day

MGEX lagged more and more as the grains were pushed higher. Obviously I'm the wrong guy to ask about why CBOT wheat was 20 cents more attractive by the end of the day. Some of my Dec MGEX I sold out vs CBOT, but some I held and some I rolled to March.

As I mentioned yesterday, there is pressure on the front of the CBOT market and there isn't that much more room for Dec/March CBOT to run... even with the VSR hike Dec/March will only be 40 cents plus financing-which could be anything from zero to four cents. So I rolled from long Dec MGEX/ short Dec CBOT to long March MGEX/short March CBOT at 24.5 cents cheaper. If I can pick up 25 cents every 3 months on that spread, I will be long MGEX at $1.50 under CBOT by this time in 2012...

Grains Hoisted Higher

On a day when broad commodity indexes like the old CRB (now called the Continuous Commodity Index) posted gains over 1%, CBOT wheat stayed within a few ticks of unchanged for the bulk of the day. The premium for Dec MGEX over CBOT stayed up near 58-59 cents. I continued to add to that position today. The difference between the Dec10/Dec11 carries for CBOT and MGEX continued to increase-stretching to over 60 cents at the close. The differences in the carries can manifest themselves in a variety of ways, but I am betting that there will continue to be a lot of pressure at the front end of the CBOT market.

I am also long both Dec Oats and Ethanol vs corn--looking forward to earning as those positions roll forward, particularly on the ethanol which is in backwardation.

Markets Unchanged, Nothing to Post

Marking Time in Wheat

Didn't trade. Stopped watching the market around 11:15 in NY. Glanced at the final 15 minutes.

Spent some time mulling over how the MGEX seats are the same price as the first half of 2009. I assume the Exchange real estate operations are struggling-perhaps worse than the overall Minneapolis commercial market. But as CME shares move back toward $300 and ICE shares push toward $120 (if ICE liked Winnipeg, they should love MGEX), these seats seem very cheap. I think we are only about a month away from the KCBT setting their dividend for the year--over $20K/seat last year. Over a 5% yield on the $390K last trade. Now if only the MGEX had a $5K annual dividend....

Why Don't We Just Buy Corn?

Really, I don't do very much outright speculation and I am not going long here. In fact, I did get the chance to buy Dec Oats at 62.5% of Corn. I do this with very low leverage because I plan to stay in long Oats/short Corn unless Oats drop to below 55% of Corn. So that means I have to be prepared to lose 40 cents/bushel if corn really spikes up. I am also short Corn against long Dec Ethanol.

With Dec CBOT wheat below 1.2X corn, we are getting into an area where corn is going to have to lift the entire grain market to move higher--and that's in addition to corn already carrying the weight of large commodity index longs and large trend-follower longs. That's a lot of weight to carry.

The wheat futures were uninspiring by comparison. Dec MGEX approached 60 cents premium to CBOT which was a strong showing in an up market. In a move I may regret, I let go of the long Dec11 MGEX vs CBOT at around even. That Dec11 spread has been in a 5 cent range for a month, so hopefully, I'll get a chance to get back in with MGEX at a discount.

Typical Down Day Dynamics

Speculators lightened equity and commodity positions today. Wheat traded down in line with most other markets. CBOT dropped a few cents more than MGEX or KC. Calendar spreads for the more distant months went to steeper contango. Even though the overall direction was down, the Dec11 wheat contracts were well bid with standing orders to buy every penny down on the MGEX.

A big sell-off in oats brought them back to less than 63.5% of corn. I will be looking to buy them if they drop another couple of percent on that ratio. The 300 lots of Oats that traded in the last 10 minutes appeared to be 10% of the non-commercial longs getting out. Corn, on the other hand, traded up 3 cents in the last 10 minutes without notable liquidation pressures.

KCBT Not Moving to VSR...

Apparently defying the CFTC's wishes, the Grain Service newsletter reports that the KCBT is instead considering a rise in storage charges to 6 cents/month with a seasonal 3 cents/month surcharge from July through November. The KCBT wheat contract committee expressed concern that a change to VSR could negatively affect liquidity; this fear has been addressed at the CME in this study which was published back in July. To my knowledge, the MGEX has not considered any changes to its 5 cent/month storage rates.

Dec MGEX moved to the highest level since June against the CBOT trading at a 53-55 cent premium for most of the day. A couple of cents of today's move was due to the steepening of the CBOT contango relative to MGEX. Intermarket spreads further out, say in Dec11, didn't move from recent ranges.

Consolidating Near the Highs

MGEX Dec wheat spent the day in a narrow 1% trading range that was well within the same range we have seen since the surprising USDA report last week. Looking further out at Dec11, we see the CBOT wheat contract consolidating close to its summer highs of $8/bushel; while the Dec11 MGEX is about the same $8 price now, that is above the summer highs for MGEX.
It will be interesting to look at the CFTC COT report. It would be a more bullish scenario if non-commercial trend-followers weren't holding such large net long positions.

Stepping Back In...

It seemed riskier to be out of the Dec MGEX/CBOT spread than in it. So I jumped back in buying the Dec MGEX at about 50 cents over CBOT and also at around 10 cents over KC. Don't forget to buy a little extra on the long side as a "tail hedge" against the risk of a rising grain market spurring the CBOT to narrow the spread.

I believe that at normal to lower-than-normal premiums for MGEX over CBOT that it will pay to own the MGEX contracts as the CBOT contracts will be subject to increasing VSR contangos. Already Dec/March is 22 cents more expensive to carry on the CBOT. There is every indication that full carry on the Dec/March CBOT will be around 43.5 cents--about 27% annualized to carry CBOT wheat.

Stepping Out of MGEX Wheat for a Moment

On today's pullback in the wheat market, we saw the Dec MGEX contract trading back up to the 47 cent premium level vs the CBOT. While I don't see this as overpriced at all, it does seem that there has been pressure on that premium as the grain markets have rallied over the past couple of weeks...so I went to flat.

Bids have come into the MGEX membership market, with 2 bids coming in over the past 2 days at levels above the last sale. One of those was mine. Don't know if this is related to the Board election results--though it is unusual for an incumbent not to be re-elected to most boards.

Reviewing Some Bad Calls....

Before the huge run up in wheat prices this Summer, I used to point out that wheat was cheap at below 1.3X corn, but what with the big wheat inventories it would likely get cheaper. Of course wheat sky-rocketed to about 2X corn, but funny enough, it is all the way back down to 1.25X corn. Interesting. Cattle don't usually get to eat bagels...

Another swing and a miss related to this corn rally is my call on buying ethanol vs selling corn. Even though the ethanol market remains very tight, continuing to trade in backwardation in the nearby months, ethanol was not at all able to keep pace with corn today. While I still like the trade, I have scaled back my position size (at a loss) due to the higher volatility.

And on a final note, I also reduced my position on long Dec MGEX vs CBOT--again, I like the position, but want a smaller size due to the higher volatility in grains.

Godot Arrives...and He's Buying Grains

I guess those USDA numbers were surprising. I was surprised by the reaction. It looks like there are people willing to get long at these higher levels. Hope it works out for them.

The hard wheat futures didn't quite keep pace with the CBOT, but it was pretty close. Even with the tighter grain inventories and the new highs in Corn, the grains are not going to get much ink from the press since other commodities like cotton, tin, gold and others are all making more stunning moves higher at the moment. Unlike this Summer, the grains will have to see actual demand eating into inventories to keep the rallies going. That said, the fundamentals do look positive. My thinking is that the next leg of the rally in wheat will see stronger performance from hard wheat futures relative to CBOT than we saw on the first leg this Summer.

Waiting for USDA....

Feels more like Waiting for Godot, but unlike the title character in the Beckett play, the USDA report will actually arrive tomorrow. My approach to most news releases is that they are unimportant with regard to fundamental supply/demand information, but revealing with regard to traders' positions and inclinations. My bet would be that the large speculative long positions in grains (especially Corn) will come under further pressure.

I was nervous about holding my long Dec MGEX/short CBOT today as it was very steady at lower levels-no sign of bargain hunters at 45.5/46 cents over CBOT. But the relatively strong MGEX close and the prospect of some CBOT liquidations tomorrow gave me the incentive to hold on for a bit longer. We'll see how that turns out...

Adding a Little Bit Here and There...

MGEX just about kept pace with the rally in CBOT wheat today; the Dec spread spent the majority of the day at 48-49 cents premium MGEX. I added to the "tail hedge" on concern the massive rallies in other commodities would spill into wheat. On the intermarket spreads, I added out in Dec11 where it was possible to pick up MGEX at 5 cents discount to CBOT.

The DTN cash index for Spring Wheat is around 75-80 cents premium to Soft Red Winter Wheat, so I am hoping for at least that kind of number for the Dec10 MGEX/CBOT spread eventually.

No New News Today

Recent trends continue in wheat-outright prices lower, calendar spreads move toward steeper contango, CBOT liquidations drive intermarket wheat spreads to bigger premiums for hard wheat futures.

Ethanol is recovering versus Corn. The combination of higher Crude/RBOB Gasoline and Corn under pressure from speculators liquidating long positions has helped Dec Ethanol impove by about 7 cents/gallon over the last few sessions. Not too shabby, but I think there could be a lot more upside to come.