I don't want this site to degenerate into daily market recaps. I have generally been long MGEX vs CBOT for some time and the daily moves are important because I would really like to make some money on them. But, generally, I would like to write more about the thinking behind the positions. In this most recent case I have been positioned in line with my belief that the high penalty rates for holding CBOT wheat (shipping certificates) will force the CBOT to a large discount to MGEX as delivery approaches.
This theory has generated excellent results except for the huge debacle that was the spike in wheat prices over the summer. (Other than that Mrs Lincoln, how was the play?) So to defend against that, I have tried to be more nimble and I have added significant "tail hedges."
At the moment, I have gone flat on the intermarket spreads. That's the nimble part. I believe that March MGEX will tend toward the 75 cent premium to CBOT we see now in December, but as the wheat futures bounce back up after a 15%+ sell-off, the MGEX premium may contract in the short-term.
One calendar spread I have on is long Dec10/ short March11 KC wheat. The MGEX and CBOT Dec/Mar spreads are both inside the cost of carrying the certificates, so I think there could be a late move in the KC spread toward 13 cents.
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Regarding your recent posts on ethanol, have you came across any research analyzing the potential effects on the market if the blender's tax credit is not extended at years end?
ReplyDeleteTodd Neeley writes the Ethanol Blog for DTN/Progressive Farmer. Here's the link:
ReplyDeletehttp://online.dtn.com/online/common/link.do?symbolicName=/ag/blogs/template1&blogHandle=ethanol
He doesn't have anything on there recently about the potential effects, but I think it can only be negative for ethanol pricing if the Blender credit is not extended.
Surprisingly, the effect may well be very small. Ethanol is currently cheaper than gasoline by the gallon, so there is some incentive to blend it. With sugar prices over 25 cents/pound, Brazilian should be refining cane into white sugar and not making ethanol at all--so there won't be any significant imports even without a tariff.
Bottom line is that it looks like the blenders are pocketing the lion's share of the credit and that the credit is not an important influence on production or consumption of ethanol today.