Hard to Stay Away from Irresistible Hard Spring Wheat

As much as I would like to sit back and wait for bargains to throw themselves at me, I feel I am missing out if I don't have a trade that I like. In general, I like intermarket spreads in wheat where I short CBOT wheat; Soft Red Winter Wheat has usually traded at something like a 10% discount to Hard Red Spring Wheat due to its lower protein content, but nowadays, CBOT wheat also incurs much higher storage rates due to the exchange's VSR rules.

Right here, I feel that the market has pushed MGEX HRS wheat to a big enough premium so that it's risky to put on a position at the front of the market: March MGEX at 90 cents over CBOT isn't cheap in any obvious way to me--there's no "edge." But if we look out farther on the futures curve, and consider KC wheat, then I think there is a trade. Dec11 MGEX is less than 10 cents over KC. The KCBT has adopted new storage rules (higher rates, especially from July through November) that may well make KC less attractive to hold than MGEX. And 10 cents is below the historical norm anyway.

So, even though there may not be as much volatility farther out on the curve, I feel there is so much less downside that I prefer to be positioned there.