More Pressure on MGEX

MGEX wheat didn't see any love today. While KC added 13 cents and CBOT added 7-8 cents, MGEX dropped 6 cents. The front of the MGEX curve was a bit weak too--both March/ May and May/July dropped a penny or two.

So now March MGEX is under $2.00 premium to CBOT and July is under $1.30 premium. I'm still betting it's a bargain here. The MGEX calendar curve is still strongly inverted and there is not some crazy stampede into CBOT (as in the 2010 Russian drought. MGEX wheat is the only wheat market in short supply. Is $1.95 premium too much? Maybe, but this is down from $2.70 premium for March just 6 weeks ago, so there is certainly less built into it now.

Happy New Year!

Some Pressure on MGEX

The cash premium for Hard Red Spring wheat has declined to around $2.40 over Soft Red Winter, and July MGEX has dropped to less than $1.40 over CBOT. However the calendar spreads are still quite firm for MGEX and Duluth inventories continue to decline.

At this point I still believe that there is some short covering on CBOT that is forcing that market upwards more quickly than MGEX. But it has been a somewhat painful theory for the past week.

My biggest current worry would have to be rebalancing of commodity indexes next week which could spur significant CBOT buying. Oh dear.

And Now into Both MGEX and KC

With July MGEX at just over $1.50 over CBOT and July KC at only 35-36 cents over CBOT, I am long both the hard wheat futures. Cash markets for spring wheat are at least $2.50 over soft winter wheat and hard winter has at 50 cents premium to soft winter, so the forward levels are reflecting the steeper contango on the CBOT.

I suppose the theory is that higher nearby prices will kill demand for the hard wheats and so cash prices for them will ease relative to the CBOT's soft winter wheat as July delivery approaches. Essentially, the market is rationing the hard wheat efficiently and premiums will decline over time.

I'm not sure that's happening. Seems more likely that the relative shortage of hard spring MGEX wheat is forcing the backwardation to increase on that curve, while the CBOT curve indicates that market will stay well supplied right through harvest. It is just a lack of speculative capital that allows that MGEX contract to trade at such a small premium to CBOT out in July.

Switching Out of KC and into MGEX

With KC at the high end its range vs CBOT and MGEX nearer the low end, I made a switch. Though MGEX is at a far more elevated premium on an historical basis, the calendar spreads have remained tight and inventories are leaving Duluth once again.

Another interesting calendar spread is over in Soybeans--the crop isn't small and there should be plenty of supply, but March12/May12 beans are at the cost of storage, though only about 75% of full financial carry (calculated on 2% over Fed Funds). So that spread could go to 14 or 14.5 cents, but this seems like a cheap way to play for a rally in grains.

Still Muddling Along

The premium for March12 KC to CBOT has remained within a 5-6 cent range for a week now: 53-54 cents at the bottom, 59-60 cents at the top. MGEX intermarket spreads have been more volatile with March trading up to $2.40 premium to CBOT and below $2.20 as I type this.

The KC and CBOT calendar spreads show no indication of tightness for the foreseeable future while MGEX is in backwardation until the 2012 harvest--and less than 50% of full carry even then. Given the high global inventories of wheat, I feel more comfortable participating in the well supplied KC and CBOT markets. The MGEX premium appears to be under some pressure with the high prices killing demand. We can take another look after the inventories are released tomorrow.

I don't see any compelling trades at all. Someone please tell me I am wrong. Maybe CBOT wheat is cheap relative to Euronext?

Wheat Futures Muddle Along

The premiums for MGEX and KC wheat have generally softened as the wheat futures have traded sideways near recent lows. Ag futures are not only not in the spotlight, they aren't even on the stage. Focus is on the euro, and oil and stocks...when it comes to ags, there is more interest in MF Global than any actual crops.

One calendar spread that has caught my eye is the Sep12/Dec12 on KC which is trading at the same level as the same period on the CBOT. While that isn't a crazy level, it seems to me that there is a far greater likelihood that the contango for CBOT could steepen toward 40 cents or more, while full carry for KC will top out at 30 cents.

Feckless Trading

feckless:1. Lacking purpose or vitality; feeble or ineffective.

Back into KC at slightly higher levels. Only keeping a tiny long MGEX positions. My view on the outright wheat price has clouded my spread judgment. As it has become clearer that US wheat exports are struggling at current prices (leading to higher inventories), I have become nervous about being long MGEX or KC vs CBOT as I fear the premiums will shrink as the wheat price declines.

This is an irrational fear. First of all, I don't know which way wheat prices will move, but I should be wary of being bearish when non-commercial postitions are already quite short. Second, there isn't such a correlation between the outright price and the spread premiums that I should worry too much about it.

Further, if inventories are high and contangos go to the exchange limits for cost-of-carry, then long anything and short CBOT will have a big edge in financing.

Shifting Back to MGEX Vs CBOT

Though my gut feeling is that this move is premature, I exited the Long March12 KC vs CBOT and replaced it with long March12 MGEX vs CBOT. With wheat prices generally lower and the premium for Dec11 MGEX or cash Hard Red Spring wheat declining, the stocks have started to flow out of storage in Duluth once again.

The current $2.20 premium for March12 MGEX does not look like a bargain on a historical basis. Positions in MGEX/CBOT spreads should be smaller than KC/CBOT because it is a more volatile pair, so I will step in here gingerly.

KC Wheat Bouncing Back....Against CBOT Anyway

What seemed to be a short-covering rally in wheat futures faded badly today--almost an outside day: almost over Friday's highs in the first few minutes, then trading down below Friday's lows. So, not much pressure on CBOT's short non-commercial speculators to cover more there. Also some news out of Australia that the crop is weighted toward lower quality feed wheat--competing with US corn for export to Asia.

The net effect was that March12 KC has bounced back to 60 cents over CBOT. After finding the discipline to add a bit late last week, I was looking to lighten up as the spread pushed over 60 cents. I still like the position and the selling is just to gain flexibility for further trading...

More Pain...

Mar12 KC wheat futures fell to 48 cents premium to CBOT today; not a big surprise since the tone of the market was set by outside markets rallying on central banks easing policy--so more positive impact on the speculator-sensitive CBOT contract.

At the front end of the market, the Dec/Mar KC spread tightened notably and there were reports of cash wheat trading at a premium to Dec11 KC contracts.

I did not add at better levels.

In some additional painful news, MF Global appears to have hit the bid for 1 MGEX seat at $106,000 and may have 3 more to sell...with the best bid now only $80,000. Distressed seller of MGEX seat with the rest of the equity market up 6% in 3 days. Looks like an opportunity.

CBOT Short-Covering Dominates

MGEX and KC wheat futures failed to keep up with the rally on the CBOT. The Mar12 KC premium has dropped from around 70 cents to just over 50 cents; March MGEX has fallen 50 cents versus CBOT--from near $2.70 to $2.15.

The CFTC reported that short interest continued to grow on the CBOT wheat futures. Further, via Twitter we had Al Conway (http://www.cashwheatreport.com) speculating about more passive index buying for the new year:

CFTC CIT (sic) report shows wheat funds record short 86 K contracts & Index fund reallocation suggest they buy 42 K contracts wheat in New Year.

Also we saw inventories build slightly at Duluth for MGEX. The premium for Dec11 to Mar12 which was as high as 85 cents/bushel, crumbled to 5 cents (flat at one stage today) going into the First Notice Day tomorrow.

So, overall, there isn't much bullish news out there. Wheat inventories are substantial; the weather is good; the US dollar is strong. However, the non-commercial players are short and the longer term investors are under-exposed. It's a situation where a rally could fuel further rallying.

But I'm not willing to bet on (or wait out) a rally. We have only seen March12 KC at levels this cheap versus CBOT a couple of times over the last 4 months. There is much more room for the CBOT contango to steepen than there is for KC. Eventually the large inventories (CBOT's Soft Red Winter Wheat has the highest stocks/use ratio) will eventually take their toll--especially if even more index investors get on the long side. So I am keeping and adding to my long Mar12 KC vs CBOT position.

Writing Before the Close...

Dec11 MGEX wheat has dropped 80 cents/bushel vs CBOT in just the last 4 sessions. It is now about 65 cents/bushel below where it was when I noted that the MGEX premiums were too risky for me. I should note that I was not not long the Dec11 MGEX anyway, but rather the March12 and July12 MGEX which are only about 15 cents lower and unchanged respectively versus CBOT. I am still patting myself on the back for avoiding some extra volatility...

Brain Cramp!

Amazingly, even as the backwardation in MGEX calendar spreads collapsed yesterday--knocking nearly 40 cents off the Dec11 MGEX premium to CBOT--I never checked the Tuesday morning release of deliverable stocks for MGEX. If you follow the link and open the spreadsheet, you will see that stocks rose slightly. Quite a reaction from the market.

The reason I missed the MGEX report is that my focus is more on KC vs CBOT because that's where my money is. That market was not remarkable at all. Perhaps there was some spillover selling of KC and buying of CBOT caused by the large MGEX move, but the KC-CBOT intermarket spread closed unchanged.

After Further Review...Climbing Back into KC Wheat

While I'm leery of the large premium for high-protein spring wheat, and I'm sure the difference in storage costs between MGEX and CBOT offers little protection at these levels of the intermarket spread, I re-established a long KC versus CBOT position. March KC at 68-70 cents over CBOT isn't a crazy level.

My worries about short covering on the CBOT are still present, but there's no reason that has to turn around any time soon.

My email address is in the "about me" section on the lower left side of the page.

More Comments on MGEX Backwardation

Due to lack of space under a previous post, I will continue the conversation on MGEX backwardation here.

The basis between cash Hard Red Spring Wheat and Dec11 MGEX futures does not seem unusual: the cash is about 25 cents under the futures. The MGEX charts are here:
http://www.mgex.com/charts.html?page=mspread&cc1=MW&spr1=MWZ11&mon1=Z&year1=11&cc2=IP&spr2=IPY11&mon2=Y&year2=11&size=b&den=high&jav=adv&data=A&expm=0&date=111811&code=xmri&org=com&crea=Y&sprd=Y&button=Create+Spread

With MGEX deliverable inventories at the lowest levels in many years, it isn't surprising to see MGEX futures at big premiums to other wheat futures. However, since there are 12MM+ bushels in storage, why is the market in backwardation? I think the only explanation is that buyers are willing to pay a "control premium." As Ken has pointed out in comments, there wouldn't seem to be any source of more inventory over the next 6 months. So buyers are willing to pay up for the current inventory stock.

So why isn't the backwardation steeper for March12/May12 and the more deferred spreads until the new crop comes to market in Sep12? I believe that there is some chance that the very high prices for Hard Red Spring Wheat in Duluth will simply kill demand. Within the last 5 years we have seen 2 instances where the deliverable inventories grew over the period from November (after the harvest) to the following August--2006-7 and 2009-10. It isn't certain that the market will tighten as inventories are consumed; supplies will continue to trickle in, while exports and domestic consumption will be constrained by high prices.

That's my take on it. Sadly, Ken, the only view I have from my MGEX seat is of anonymous electronic screens--I don't see any customer flows whatsoever. I am purely a prop trader using public data.

Finally, I'm going home flat tonight. While I still favor KC over CBOT, the forward curves are not so different at this juncture. If one accepts the spread in cash markets to be a fair price, then going out to July only gives the KC longs a 15-20 cent advantage (47-48 cents premium for July12 KC vs CBOT as opposed to 65 cents in current cash markets). With the prospect of a surge in CBOT futures prices powered by short-covering, I would rather wait and see.

MGEX Is Apparently Bulletproof

Why, oh why, didn't I stay long the beautiful MGEX?

Really, I won't lose sleep over it. I have been surprised that the premium for KC over CBOT has not grown as the overall wheat market has seen prices drop. I assume that CBOT wheat is seeing more speculative selling..maybe the prospects for better growing weather in the Hard Red Winter Wheat growing areas has had a negative impact on KC prices. Or maybe CBOT shorts are providing a bit of a floor to that market (doubtful).

Anyway, the July12 KC remains close to 50 cents premium to CBOT, so there hasn't been much to get excited about.

KC Wheat Struggling

My conservative move into long KC wheat vs CBOT (from my former long MGEX vs CBOT) delivered nothing but misery today. July 12 KC drifted down to around 48-49 cents premium to CBOT--after opening higher at 55-56 cents premium. I continued to add long KC vs CBOT.

CFTC COT report showed very high levels of CBOT shorts (45K) and the Dec CBOT firmed sharply on the calendar spreads. So that's sums up the tough part of shorting the CBOT. On the other hand, Cash markets premiums for protein remain very firm and cash Hard Red is around 80 cents over Soft Red. So the fundamentals seem friendly enough.

New Twist on My One Wheat Idea

The reason I trade MGEX wheat is that I believe the passive commodity index investors distort the pricing of the wheat futures on the CBOT in significant ways. The general idea, especially after the CBOT instituted the VSR regime, was to hold the low cost of carry MGEX wheat while shorting the high cost of carry CBOT wheat.

This has been a very good strategy--but not entirely for the right reasons. The MGEX has been far stronger than just "low cost of carry," it has develop3ed a persistent and substantial backwardation. We now see premiums for nearby MGEX wheat futures to CBOT that have occurred very few times over the last 100 years. Maybe they will go higher, maybe not. The thing is, analyzing the degree of tightness in Minneapolis wheat is not really my game.

So I have liquidated my long MGEX vs CBOT positions and will replace them with long KC vs CBOT positions. For now, I nibbling away at July12 KC at just over 50 cents premium to CBOT.

PS. The CBOT calendar spreads have been liquidated, since the Goldman roll is nearly over and the spreads narrowed to realistic commercial cost of carry levels.

New Data, New Theory on MGEX Wheat

Yesterday's rally in MGEX wheat futures was not likely related to MF Global liquidation, since open interest rose sharply. Therefore, yesterday's buying of MGEX futures, included deferred contracts like Dec12, represented new positions.

So I ventured out to re-establish long MGEX positions in March12 and July12. The levels aren't exactly what I would like, but they are a lot cheaper than cash levels for Hard Red Spring Wheat. I am beginning to shy away from Dec12 due to the rules change which allows non-US origin (Canadian) wheat to be delivered. If Canadian wheat is allowed, then I can only assume (with greater supply and unchanged demand) that prices may drop.

Every Dog Has His Day

In what appeared to be some MF Global related activity, MGEX premiums to CBOT jumped 15-30 cents higher near midday before closing back close to unchanged. With the USDA report out tomorrow, it was a good opportunity to liquidate all my MGEX versus CBOT spreads--especially out in Dec12 where the market went to around $1 premium for MGEX from yesterday's close of 70 cents.

Also liquidated all my CBOT Dec/Mar spreads at that contango narrowed to to about 22 cents from last week's 35-36 cent level. While traders normally expect the "Goldman roll" of passive index long positions to drive the contango to steeper levels, there are many fewer longs to roll this time around--about 60K fewer as index positions are smaller and non-commercials are about 40K contracts short.

Calendar Spreads Dominate Wheat Futures Trading

The contango on CBOT wheat continued to shrink today with a scramble at the closing bell. And the Dec11/Mar12 backwardation increased on MGEX to over 65 cents. The intermarket spreads were somewhat mixed with the MGEX weakening on all but the nearby Dec11 contract. Given that the outright markets traded around the unchanged level for much of the day, I didn't regard the drift lower on the MGEX intermatket premium as being significant--cash levels for Hard Red Spring Wheat stayed very strong.

Not Much Impact from MF Global on MGEX Wheat

MGEX calendar spreads and its intermarket levels versus CBOT are not much changed in the wake of the MF Global fiasco. I continue to keep low risk levels generally. The short squeeze on Dec11 CBOT shorts is not spectacular so far, but the Dec11/Mar12 contango is narrowed 3 cents today, so it may be developing.

MGEX Wheat Creeps Higher vs CBOT

As the Euro-phoria of late last week fades, downward pressure on CBOT has grown. With commodities markets generally falling, the CBOT has seen the bulk of the speculative selling. MGEX, on the other hand, reported declining inventories in both Duluth and Minneapolis indicating that the peak storage numbers after the harvest have already been seen. The backwardation of Dec11 over March has softened, but cash market premiums for hard wheat over soft are continuing at elevated levels.

All in all, it looks like a good time to hold MGEX wheat vs CBOT, especially out past the nearby, very expensive Dec contract.

Fundamentals on Hold for the Moment

With the rush toward "risk on" assets today, I thought it unwise to be short any nearby CBOT wheat. Only keeping a long MGEX vs CBOT position way out in Dec12 where MGEX is only 65-70 cents premium. I expect that many, if not all, CBOT shorts will be looking to cover if the markets continue to rally. So I am trying to stay out of the way.

Still looking for a tightening of Dec11 CBOT vs Mar12 as we go through the beginning of November. There are 15K contracts fewer passive index longs (compared to 3 months ago) to rollover and 40K non-commercial shorts that will be looking to roll or cover. My guess is that the current 35 cents discount for Dec is around 10 cents more than any commercial cost...

MGEX Wheat Unloved

Once again MGEX wheat dipped at the close, finishing at the day's lows vs CBOT. There has not really been a pronounced downtrend in this intermarket spread and the MGEX calendar spread continue to show short supplies, so at this point I am regarding the weakness in MGEX as a dip which should be bought. We'll see.

CBOT Wheat Trades Stronger

The most recent CFTC COT report showed managed money increasing thier short positions in CBOT wheat; this may have been related to CBOT wheat working its way stronger vs MGEX wheat and CBOT corn through the day. There were no major changes: nearby Dec CBOT wheat remains at a discount to corn and deferred CBOT contracts narrowed the MGEX premium to around 70 cents.

With the short positions in Dec CBOT wheat and the dropoff in passive commodity investment, I expect the Dec/Mar CBOT spread will not be blowing out to "super-contango" levels as we have seen in the past. In fact, I suspect there may may a little bit of a squeeze on Dec shorts coming up next week.

Heading for Cash...

The chief worry for me being long MGEX vs CBOT is that the non-commercial shorts on the CBOT will drive that market up faster then the MGEX. As the S&Ps and all other "risk on" assets moved up today, I cut all but my most deferred long MGEX vs CBOT positions. The timing was pretty bad--worst levels of the day--but not too different from yesterday's close.

As a small side bet, I keep trying to get long CBOT wheat vs corn. Still trying it. It's still not working.

MGEX Wheat Strong for 99.5% of the Day

But the last minute was a doozy. After creeping up to a $2.00+ premium to CBOT, the March12 MGEX sold off in the last minute to around $1.85 premium at the close. The weakness was general all along the MGEX futures curve with all the intermarket spreads losing at least a dime in the closing range.

But if we just look at the MGEX calendar spreads, the market didn't really collapse: Dec11 added a few cents more backwardation to March12 and the other calendar spreads weren't much changed. So there doesn't seem to be a huge change in supply/demand--seems like just a couple hundred March contracts sold somewhat inelegantly at the bell.

MGEX Wheat Creeps Higher Against CBOT

Not much to report over the past few days, but today as the MGEX deferred months--July12 and later-- moved up to the high end of their recent trading ranges vs the CBOT, I was a buyer, adding to positions. In all likelihood it is overenthusiastic, but the MGEX reports on stocks in Duluth and Minneapolis show declines from rather low peak levels. So maybe this run-up in Dec/March isn't done yet. Further, I don't see any reason to believe that the $2.50+ premium for Hard Red Spring Wheat over Soft Red Winter Wheat will decline to below $1.25 by July 12 delivery --just as the new winter wheat crop is harvested.

The only thing is that there is already a crowd on the short side of the CBOT wheat boat...

Intermarket Wheat Spreads Steady at Lower Levels

For the past two days we have seen MGEX wheat trade in a broad but well-defined range against the CBOT. In the back months, July has been a bargain around $1.05 premium and a good sale up towards $1.20--Dec12 MGEX has bounced between 60 cents and 75 cents premium. We seem to start an finish the day towards the lower ends of these ranges.

The big picture here is that MGEX wheat remains in a steep backwardation while the CBOT has a substantial carry cost. As long as this situation persists, I am comfortable maintaining an exposure that is long the forward (discounted) MGEX and short the forward (premium) CBOT.

MGEX Wheat Finishes Like the BoSox...

In what seemed a response to generally favorable news from the USDA on Spring Wheat supplies, MGEX dropped the least of the wheat futures ...at least until 1:14 Chicago time. For the deferred contracts, MGEX only fell back to yesterday's levels on the intermarket spreads versus CBOT, but that was a good 15-20 cents fall from midday levels.

At the front end, Dec11 MGEX was weak on the calendar spread vs March12 from the opening. Hard to say what that means, since Dec stayed over 40 cents premium to March. While that's a big drop from 90 cents premium seen yesterday, it's not exactly falling apart.

Going home with slightly lighter positions on the long MGEX vs CBOT in the deferred months.

Fears of CBOT Wheat Short-Covering Are Realized

It was always a danger to my long MGEX/short CBOT position that there would be a sharp rally driven by CBOT shorts. We saw at least part of that rally today. Impact was biggest at the front end of the market with Dec11 MGEX losing almost 50 cents against CBOT wheat. Going out a year, Dec12 MGEX only dropped a few cents versus CBOT.

As I look at the amount of Spring Wheat showing up at the MGEX elevators in Duluth and Minneapolis, it seems that the futures curve backwardation may continue for some time. While $2.70 premium for Dec11 MGEX to CBOT may be a risky place to buy, $1.00-$1.10 premium for July looks like a good bet. I'm in there and I will add cautiously. (Which is unlike how I exit-- which is in a hurry.)

Another Leg Higher on the MGEX Wheat

It's hard to see the commercial reasons for Dec11 MGEX to trade at $3.20 over CBOT and 85 cents premium to March12 MGEX, but that's what traded today. While WheatSpreader notes that the Dec MGEX premium is having an impact on the high-protein end of the Hard Red Winter Wheat market, there still has to be a chuck of anticipated Hard Red Spring wheat that's gone missing for commercials to need to cover at these huge premiums.

Very interesting that it is "commercials" (bona fide hedgers) that are driving this rally. Open interest is very low overall and non-commercial long positions are at quite low levels. Unfortunately, the trading action of the last two days will not be in tonight's CFTC COT report, but that report will be interesting nonetheless.

Link isn't working but WheatSpreader is on Twitter: http://twitter.com/#!/WheatSpreader

Golly, Where's This MGEX Wheat Train Headed?

Dec11 MGEX which was 40 cents premium to March12 at yesterday's open finished at 60 cents premium today. This tightness helped push the intermarket premium for Dec11 MGEX wheat from $2.50 over CBOT up to $2.80. That was enough for me. Just keeping the bargain level back months. Since the front month spread drove most of the intermarket change, the back months--July12 and Dec12--barely moved on the day.

Climbing Back on the MGEX Train

As I predicted last Friday, I am getting back in long MGEX vs CBOT wheat futures. My gut feeling is that I should wait longer, since it has only been a couple of days of correction. But $1.10 premium for July12 MGEX and 65 cents premium for Dec12 MGEX are pretty substantial falls from the $1.50+ and 90+ cents respectively seen last week.

At the front end, it was a little harder to pull the trigger and go long Dec11 MGEX at $2.50 premium, but the Dec11 contract continues to stay at over 40 cents premium to March and very few bushels are showing up at the Duluth warehouses, so we took a shot.

My main worry, as usual, is the speculative short positions in CBOT wheat. So once again I am adding a small outright long tail hedge.

MGEX-Mania!

I have been bullish on MGEX wheat (vs CBOT) since I started keeping this journal 18 months ago. But apparently I am not the most bullish cheerleader--I sold out the balance of my MGEX intermarket spreads.

The USDA numbers certainly favored Hard Red Spring wheat over any of the other main varieties...but by how much? The large premium for Dec11 over March12, now near 50 cents seems to be more of a delivery game than true demand for higher protein wheat. The premiums for 14% protein wheat at Kansas City do not appear to support Dec MGEX at 1.87 over KC or 2.85 over CBOT.

Further, the squeeze on MGEX does not seem to extend very far out the futures curve. While Dec is 50 cents over March, May only commands 12 cents over July, so there is some implication there of a short-term phenomenon rather than a new long-term structure to Hard Red Spring wheat pricing.

Eventually, I will get back in long MGEX--and prehaps at higher premiums than we see today--but for now I will wait. I would like to see non-commercials exit their short CBOT positions before I stake out a short position there.

USDA Spins Wheat Wheel of Fortune Tomorrow

So I lightened all my positions today. The steep backwardation in Dec/Mar MGEX continues to imply a very bullish story for intermarket MGEX vs CBOT spreads--particularly the deferred spreads like July12 MGEX vs CBOT which is at $1.25 compared to the $2.40ish level for Dec11 MGEX vs CBOT.

The futures market does not seem to be able to predict USDA reports reliably. We see very large volatility on the release of USDA reports, so whether the reports are accurate or not, they have been having a big impact on markets.

The only thing I am taking into the report is a scaled back long July12 MGEX vs CBOT.

Demand for Dec MGEX Wheat

Despite lower prices across nearly all commodity markets, including wheat, the Dec11 MGEX premium to March12 rose to new highs. I am interpreting this as a signal that MGEX will continue its overall strong trend vs CBOT wheat. While only two days ago, I feared a CBOT rally, the intermarket spread levels are more attractive today.

MGEX Wheat Retreats

After briefly seeing premiums above $2.40 over CBOT for Dec MGEX and near $1.50 for July12 MGEX yesterday, the intermarket spreads swooned to around $2.10 for Dec11 and $1.25 for July12. As I was mentioning yesterday, the CBOT contract seemed prone to short-covering and as other "risk" assets rallied around the globe, the CBOT wheat contract found more support than KC or MGEX.

Maybe I should be more patient. With Dec11 MGEX still trading at 20+ cents premium to March and deliverable stocks at Duluth only trickling in, I got got back in long MGEX vs. CBOT. The closing levels looked like a bargain compared to the prevailing levels for most of the day. So maybe I will lighten up if there isn't a bounce at the open tomorrow...bargains are prices that aren't available for a long time.

Dec MGEX Wheat Up and Away...Thanks, and I'm Out

The premium for Dec MGEX over CBOT expanded from less than $1.70 to over $2.30 in 4 sessions. Taking a step back, we can see that over that 4 day period, MGEX rallied 30 cents while CBOT dropped 30 cents. While there has been some speculation that the MGEX rally is due to a smaller than expected crop coming in, the changes in the calendar spreads are somewhat mixed.

Taking a further step back, we can see that the CBOT price drop is a continuation of a month long 20% drop in the wheat market. Obviously that isn't due to expectations of a small crop. The wheat market drop seems much more due to the general commodity environment, where there have been significant liquidations of speculative long positions. In fact, the COT report shows that as of last Tuesday, "managed money" was short about 25,000 CBOT contracts.

To me it seems that the CBOT wheat is oversold. The USDA report due out on Friday may clarify crop size issues. Today's price action may show an "outside-day reversal"-- CBOT wheat made new lows, but finished higher. There may be a very good bullish case for Dec MGEX wheat, but I am not convinced it is better than the case for CBOT wheat at these prices. I'm flat.

Mighty Dec MGEX Trades to Higher Premiums

Dec MGEX was bought up to higher levels both on a calendar basis vs March and an intermarket basis vs CBOT. Dunno why really. Informa released a crop estimate for Hard Red Spring wheat that was lower than the USDA published in August...but was perhaps higher than the expectations for this revision.

Further, the other calendar spreads, March12/May12 and May12/July12, didn't really follow the Dec11/March12 lead, so it isn't clear that the market expects a small crop that leads to tight inventories. Apparently just a lot of demand for Hard Red Spring wheat delivered right now or very soon.

MGEX Wheat Overlooked in Sell-off

If this trader was at all typical of most grain traders, then the market was entirely concerned with developments in global equity and bond markets. The liquidation of "risk" assets including commodities was front and center all day. But not many macro investors own MGEX wheat, so the decline there was relatively moderate. And the MGEX premium to CBOT increased.

When the pendulum swings and the macro investors are back in buying corn and CBOT wheat (where they are short), it may be a bit tougher to own this spread. Hopefully, a few extra longs as a tail hedge will mitigate the effect of speculators rushing to buy Chicago wheat...but that day looks far off at the moment.

Slow Growth in MGEX Deliverable Stocks

The weekly report on deliverable inventories continues to show slow growth in the wake of a late harvest. http://www.mgex.com/grain_historical.html

This should support the current premiums for MGEX wheat over CBOT, but leaves me puzzled about MGEX calendar spreads. If traders are paying 8-9 cents premium for Dec over March, where is the Spring going to come from that will drive May12 down to even with July12? In other words, if the market is so tight in Dec11, why won't it be tight in May12?

Today's Intermarket Wheat Spreading

I like the current futures curves in both MGEX and CBOT wheat. The MGEX is relatively flat over the next year. The CBOT is in, by historical standards, steep contango and with the current VSR rules may go to a steeper contango. So as we go out on the curves, MGEX trades at a smaller and smaller premium. And the beauty of it is that this is not due to the market anticipating a smaller cash premium in the future, but because the CBOT has established rules to make it very expensive to hold their wheat futures.

As time goes by, the premium for any MGEX futures contract to CBOT should move toward the levels seen at the front end of the curve--if all others things remain the same which, of course, they won't. The chief worry of mine is that CBOT will rally very rapidly due to its cheapness relative to corn.

I think this problem can be mitigated by purchasing around 10% more MGEX futures on the long side. Sure, there's plenty that can go wrong with that, but I like it better than waiting on the sidelines while MGEX steadily appreciates vs CBOT.

Dec MGEX--The Worst Wheat in World (Today)

Frustrating day for lovers of Dec MGEX wheat futures as the market strengthened vs CBOT from the opening towards afternoon only to plunge late in the session. I added to my long Dec11 MGEX vs CBOT position while the market was strong and that looked pretty dumb by the end of the day.

Certainly there is the possibility that MGEX will continue to weaken versus CBOT as both market trend downwards--with the CBOT descent slowed by its cheapness relative to corn. That would be rather painful for me.

MGEX Calendar Spreads Show Strength

With Sep11 off the board, Dec MGEX was the strongest of the grain markets. Not surprisingly, with corn dropping 3% there was not so much support for CBOT wheat and the Dec MGEX/CBOT spread added almost 15 cents. The action was more muted farther out on the curve with July MGEX up only about 5 cents against CBOT.

I only managed to put a toe back into long Dec11 MGEX vs CBOT positions.

Murphy's Law Strike Again...

Negative news for wheat prices --I would presume aggressive export competition from Russia/Ukraine--had an impact on KC and even mighty MGEX, but the cheap CBOT wheat was bulletproof. As corn added a couple of cents, so did CBOT wheat.

As a result, I ejected the nearby long MGEX vs CBOT positions for a loss. Farther out on the curve, the intermarket spreads were steadier and toward the end of the day I used the sell-off in MGEX wheat to move my Dec12 MGEX vs CBOT position in to July12.

Overall, while the wheat/corn ratio levels will encourage feeding wheat, there is still going to be plenty of Soft Red Winter Wheat inventory--enough to drive the carry back towards record contango levels. So while it's tough to pick levels to buy nearby MGEX wheat because the relationship will be volatile, the forward curves will continue strongly to support longer term long MGEX vs CBOT positions.

Waiting for the Hard Spring Wheat Harvest

The expected rivers of wheat flowing toward Minneapolis are thus far just babbling brooks trickling in...

MGEX deliverable stocks in Duluth are only up about 1.5MM bushels from the pre-harvest lows, while in recent years we have seen inventories jump by more like 5-9MM bushels by this date. Maybe it's just a little late.

A late harvest explains why Sep is trading 40 cents over Dec, but it doesn't account for why every spread for the next year is in backwardation. That indicates a tight market even after the harvest.

I'm maintaining smallish long MGEX wheat futures positions vs CBOT. The chief worry on these is that CBOT wheat is already so cheap vs corn: Dec CBOT wheat is 20 cents under corn.

New Positions at Steeper Levels

After a 2-3 week break from hectic wheat futures action, I have resumed trading...putting on both long Dec11 and Dec12 MGEX vs CBOT positions. With the Dec11 MGEX at a lofty $1.70+ premium, this doesn't qualify as bargain hunting.

Still, the futures curves still favor this position. Tight nearby supply has Sep11 MGEX trading at around $2.40 premium to CBOT. And while the MGEX Dec11 contract is trading at even with March, the CBOT Dec11 is at over 35 cents discount to March with another 30 cents of downside to full carry...

Once More unto the Breach...MGEX Edition

After having been shaken out of long MGEX/short KC and CBOT wheat positions two long weeks ago, once again I am grasping the high-protein, spring-planted MGEX and shorting the CBOT. Since I don't want to get pushed out of this position by mark-to-market misfortune, the positions are more modest this time. Also a bit farther out on the futures curve.

Pro: Very tight MGEX calendar spreads indicate little supply.
Con: Speculators covering short CBOT could drive that up faster. Also, a corn rally could drive CBOT up faster.

More Discipline

Only this time, the "get out of losing trades" kind of discipline.

Hottest July since 1955 in Iowa and more heat still to come ...This weather has pushed corn back to the highs (for Dec) and pushed the bottom end of the wheat market up with it. Therefore Long MGEX vs anything was the wrong way to be.

Further, on the calendar spreads, expensive corn leads to more livestock seeing CBOT soft wheat in their rations, so that Sep/Dec spread reflects tighter supplies and we had to exit that as well.

Flat all around now.

Two Full Sessions with No Wheat Trading

What discipline!

Intermarket wheat spreads have continued to trade in a narrow range.

Calendar spreads on the CBOT continue to drift toward steeper contango. If the Sep/Dec calendar spread continues on this trend, I will liquidate in 4-5 days against the GSCI index investors rolling their long positions to Dec.

Adding and Adding

Sep CBOT wheat has dropped to 42 cents under December. There are likely over 100,000 Sep CBOT contracts still held by passive index investors and that accounts for the bulk of Sep long open interest and they are paired up with commercial hedgers that are short. It seems to me that it is quite possible that the Sep will trade down to the VSR full carry at 63 cents under December. So I added to that calendar spread position.

Nearby Sep MGEX wheat continues to show strength, now trading at a small premium to December. So with that bullish indication in the front end of the market, I added a new long Dec MGEX, short Dec CBOT position to my existing long Dec MGEX/short Kansas City position.

Why Is September MGEX Wheat So Tight?

Even as the price of September MGEX wheat has declined on an outright basis by $2/bushel over the last 2 months, the Sep/Dec calendar spread has continued to indicate a tight supply with Sep closing even with December today--the same level that spread traded when the outright market was $2 higher. Crop ratings remain pretty good. The decline in deliverable stocks at Duluth and Minneapolis has abated. It doesn't look like we're going to run out before the harvest comes in...so why isn't the market charging anything to store the harvest through December?

Hmmm...

Also Adding MGEX on Weakness...

The MGEX/KC intermarket spread has been in a narrow range for the past few days. Demand for Sep MGEX still seems strong with the Sep/Dec calendar spread trading at just 2-3 cents discount for Sep. KC, on the other hand, is trading out at over 80% of the new KC full carry (9 cents/month storage rate from July to Dec). So, for now, I am sticking with the long MGEX/short KC position.

On the CBOT wheat, the Sep/Dec calendar spread has gone to steeper contango with Sep more than 40 cents under Dec--about 62% of the VSR-defined full carry. While I don't know if that spread can average over 52 for the VSR calculation period (which could bump the full carry number up to about 73 cents), I am adding a bit to that short Sep/long Dec position.

Adding MGEX on Strength

With Dec MGEX advancing back over 40 cents premium to KC, I added to that position.

In the calendar spreads, we see CBOT Sep/Dec wheat is not close to the VSR maximum carry for the period. Full financial carry is about 64 cents now, and the VSR bumps that up to 73 cents if the spread averages over 52 from now to the end of August. That spread went to a steeper contango today with Sep falling to a 38 cent discount; I'm betting that spread gets out toward those full carry numbers.

Can't Wait Forever...

After touching a 70+ cent premium to KC last month, Dec MGEX retreated all the way back to a sub-30 cent premium. I jumped in to buy some at a 40 cent premium today.

I always like to have a long MGEX position on, and I am wary of shorting the Dec CBOT which still seems poised to rally. Non-commercial traders are short CBOT and CBOT is very cheap compared to corn.

Watching and Waiting Some More

After scratching my intermarket wheat spreads, here's what I think now:

Corn is driving the market. As corn goes higher soft wheat gets pushed higher--the DTN cash index for soft wheat is 33 cents under corn as it is. Last month we saw Pilgrim's Pride announce that they are feeding wheat to their chickens. Today we see that The Anderson's is blending soft wheat into their corn at their ethanol plants.

CFTC COT reports showed non-commercials short the CBOT soft wheat contract, while the non-commercial long positions in MGEX hard wheat remained relatively intact. So while desperate shorts may be covering on the CBOT, there aren't many shorts at all on MGEX (and few on KC) to drive those markets.

So the effect of higher corn prices right now is to diminish the premiums for higher protein wheat.

The problem with trading on this market dynamic is that it requires one to anticipate the price of corn. I don't want to make a big bet on higher corn...or lower corn. So, I'm going to watch and wait for a while.

Grinding Through the Cheap Wheat

Following up on yesterday's idea that wheat is very cheap compared to corn and therefore seeing extra demand, we saw CBOT wheat get dragged higher with corn today. While Dec CBOT wheat did not improve versus corn (it dropped another 7 cents/bushel), Dec CBOT did outperform its counterparts on the MGEX and KC. The market moves today showed that substitution versus corn is pushing the low-protein end of the wheat spectrum higher.

At the high-protein end of the spectrum, July MGEX still trades at 30 cents over Sep and there are 1100 open contracts with only 1 week to the last trading day. So, at the bottom there is demand for CBOT and at the top there is but limited supply of MGEX. In the middle, there is no love for KC--while the Hard Red Winter wheat crop will be small in the USA, the KC contract is competing seemingly large crops from the FSU for export sales. As it sounds, I am long MGEX and CBOT against the KC.

Buying Wheat Versus Corn

Wheat at a discount to corn is free protein--better than free: you get paid to cart it away. The animal kingdom is a fiercely competitive place and that kind of deal doesn't last long on the Serengeti plains and shouldn't last long on the CBOT.

But wait, there's a catch. The punitive VSR regime makes storing wheat incredibly expensive. All the gains from cheap wheat might be devoured in carry costs. Well, after today, not so much. July (in delivery) CBOT wheat almost touched even with September, while the July premium for corn drifted back toward 20 cents over September.

Buying Strength

While I never advocate following a trend as a method of trading, I do try not to fight trends. MGEX has vastly outperformed KC and CBOT for 10 months, but because of the very different forward curves, MGEX can still be bought at levels that are not quite nose-bleed inducing. After spending a few days bouncing around 60 cents premium, Dec MGEX made a new high moving to 65 cents over KC.

With cash Hard Red Spring at a $2.20 premium to Hard Red Winter, and Sep/Dec MGEX in a small backwardation while KC is at 80%+ of full carry, there are clear indications that Hard Red Spring wheat market are tight and Dec MGEX at 65 cents premium to KC may be a bargain.

After the USDA announced much larger than expected inventories of corn last Thursday, the July corn (which is in delivery) shot up to over 50 cents/bushel premium to Sep--the highest since April, when corn was making new highs. So even if the UDSA found 300 million bushels, it doesn't look like the market found them.

Gone Flat

Lots of volatility and summer holidays inclined me to square up.

Shocking numbers out of the USDA on corn. But if the USDA was a bit high on acres planted, and use picks up with lower prices, we could be back to a tight (sub 5% stocks/use ratio) market pretty soon.

It's important not to get too attached to positions... so I will try looking at the market with fresh eyes tomorrow...or Tuesday.

MGEX Pushes Higher

MGEX strongly outperformed other wheat futures over the past couple of days--especially compared to KC. The nearby July MGEX traded up toward 30 cents premium to September. Sadly, I didn't participate it that--I was put off by the rise in deliverable stocks at Duluth last week (announced Tuesday). But in the past few days even Dec MGEX rose from 35-40 cents over KC to over 55 cents premium.

I was shaken out of my little long CBOT wheat/ short corn position as corn rallied into the upcoming USDA numbers tomorrow. Always nervous (and looking for flexibility), I took off much of my long Dec MGEX vs KC wheat position.

Specs Continue to Exit...

My trading has nearly come to a halt--I am maintaining long Dec MGEX vs KC positions. Also maintaining a small long Dec CBOT wheat vs. corn position.

Managed money futures positions in CBOT wheat are now short. With both hedgers and speculators short the CBOT wheat, the only group net long is the passive index investors. If the market should somehow turn higher, it will be quite a scramble in the CBOT wheat, since the passive investors are, well, passive--they won't respond to higher prices by selling.

While most of the ag traders are looking forward to the Thursday USDA report, I am looking forward to tomorrow's MGEX report on deliverable stocks in Duluth. With fewer than 8 million bushels in place with 9 weeks to harvest, it will be interesting to see what happens if that number continues dropping at its 1-2 million/week pace. Also, it might be worth noting that one broker took delivery on 1500+ contracts in May. That won't happen in July--because there aren't going to be that many contracts in storage...

Speculators Exit...

CBOT corn and wheat continue to fall. While KC wheat is falling somewhat more slowly, MGEX is somehow keeping pace. The huge premium for July MGEX over Sep is gone--but July is still 10 cents over Sep. And looking at the MGEX website, spring wheat available for futures delivery continues to leave the elevators, so there is a chance the prompt market will get very tight for MGEX wheat.

Looking at the KCBT newsletter, there is still about $2.70/bushel premium for 14% protein wheat there. So when the market prices Dec MGEX at only 35-40 cents premium to Dec KC, it is anticipating a tremendous harvest of high quality spring wheat in September. If such a huge harvest did come in, how low would MGEX go relative to KC? Even? On the other hand, if it is the KC's 11% protein segment of the market that sees big harvests, which seems far more likely, then something like 80-100 cents premium seems more likely.

MGEX Shows Some Stength

Last week I was moaning about how the MGEX contract had not strengthened versus the CBOT wheat despite the rapid fall in CBOT corn prices. It seems to have taken a few days, but we may be seeing that effect now. CBOT wheat has continued to fall (following corn), while the prices for MGEX wheat seem to be stickier and reluctant to fall as fast. So on contracts such as Dec MGEX we are now seeing new highs on the MGEX/CBOT spread.

Dec MGEX contracts have stayed in a narrow range versus KC over the last 3 weeks, closing today near the middle of that range. This supports the theory that CBOT wheat, being the cheapest substitute for corn, and trading at an historically huge discount to corn is the weakest sector of the wheat market and can continue to fall with corn.

Trading CBOT wheat versus corn continues to be interesting. Surely nearby CBOT wheat will trade at a large premium to corn again--eventually. But the trade is very, very expensive to carry; the deferred futures price this in. Still, Dec CBOT at less than 1.15x corn is very cheap wheat. With the July CBOT wheat at less 0.95x corn, I a not going to buy it on the way down, but it is worth watching for the eventual turn.

Still Giving Back

As corn has had 2 limit down moves in 2 days, I would have thought that the CBOT wheat have have been the weakest wheat market, but nooooo....

MGEX has dropped the most with the premium for Dec dropping to about $1.15 over the CBOT and 30 cents over KC. While the premium to CBOT is historically very high, the premium to KC is fairly normal. Since the cash market for 14% protein wheat remains at a fat $2.85 premium to 11% protein, the MGEX futures are pricing in a big and high quality crop. This seems overly optimistic to me, since planting was late and the planted acreage is not so high.

Giving Back...

Giving back a little to the market. Having withdrawn from the July MGEX, and sobered by the Goldman roll action in the CBOT July, I am sitting with some long Dec MGEX positions vs both KC and CBOT--mostly on the strength of the cash Hard Red Spring wheat market.

Even with July/Sep MGEX 90 cents off the high, the current 50 cent backwardation indicates very tight supplies of high-protein wheat. While some amount of soft wheat inventory will be used to feed cattle (now that it is at a discount to corn), it is going to have to be a lot to bring the cash premium for Hard Red Spring from $3.60+/bushel down to the Dec contract level of $1.20.

Still, with markets this volatile, I certainly am willing to get out and reevaluate if losses mount.

Bargain Hunting

As July MGEX spent another volatile day in steep backwardation, I was tempted to look out on the futures curve for bargains. Dec MGEX at 42 cents over KC? OK, I'll have a little of that. Cash Hard Red Spring wheat still trades at a premium to July MGEX, so it appears this scramble for hard, high-protein wheat will continue. Will the new crop of spring wheat be large enough that values are driven back down to more normal levels--like 42 cents over KC? Maybe, and maybe Dec MGEX will drop even more than that...but then again, with the cash markets favoring Hard Red Spring by $2.80 over Hard Red Winter, the market is building in a lot of optimism for a good HRS crop.

MGEX Falls Back to Earth

With today's plunge in July MGEX (still a hefty 30 cent premium to Sep), I bailed out of all my intermarket wheat spreads. This was a pretty easy decision to make: lower premiums for July MGEX are not bullish for new crop MGEX, lower premiums for July MGEX are not bullish for any long hard/ short soft wheat spread, premium values farther out on the calendar were nearly unchanged despite the front-month plunge and finally, recent high volatility makes me shy about holding positions that are treading water currently.

Wild MGEX

When the nearby 2 month spread has a price range equal to 7% of the underlying commodity, that's pretty wild.

While I have been very positive toward the July MGEX, I don't know where the price support comes from at these levels. Is there a real shortage of old crop spring wheat? Not in any USDA accounting I've seen. There could be quality issues that cause higher protein grades trade to larger premiums, but July $1.40 over Sep? I just don't have the boots on the ground to say whether supplies of 13.5% protein are that hard to find (or to get in position for delivery).

Farther out on the calendar, MGEX looks more reasonably priced. I've bought some Dec MGEX at 35 cents over KC and even out to July12, where I've added July MGEX at 80 cents over CBOT. Normally, I wouldn't consider 80 cents over CBOT to be a bargain, but if this July is $3 premium and the new crop spring wheat is not great while new crop soft red winter wheat looks plentiful, then 80 cents should be a great bargain... we'll see about that.

Lastly, I like being long Sep KC versus CBOT. September KC will be the first contract there with the tighter contract specs on protein and vomitoxin levels. While there may be large HRW crops coming in around the world, we can be pretty sure the crop here will be small and that the SRW crop will be large. I see the CBOT Sep/Dec going out to a full carry which will be very large, while KC could catch a bid due to the new, stricter protein specs--if protein levels are driving the current July MGEX craze, then Sep KC should improve vs CBOT.

Reduced to Daytrading

I've been keeping nearly flat overnight in most MGEX related spreads. There have been big enough ranges during the day to make some decent trades.

I can't say that I see any great bargains in MGEX spreads--not because there aren't any necessarily, but I know that I am not close enough to the physical market to see them.

Scaling Out of July MGEX

Not that I don't like, I do--but it's increasingly volatile so my positions need to be smaller. So just tiny positions long MGEX vs KC and long July MGEX versus September new crop. I was concerned that the big increase in July MGEX value was due to a very localized shortage of spring wheat deliverable against the Minneapolis contract, but with 14% protein KC wheat trading at similar numbers, it looks more like a protein issue than a location and futures issue. Tomorrow's release of deliverable stocks in Duluth will still be worth watching.

Haven't posted for a couple days due to a computer glitch.

July MGEX Staying Elevated

With another day at 10+ cents July/Sep MGEX backwardation and July MGEX at 70+ cents premium to KC, it doesn't so much look like a spike in July MGEX as persistent demand at these elevated levels. The MGEX deliverable stocks continue to fall in Duluth-- which is no surprise at this time of year, but could lead to a crunch on July deliveries. Especially if we see buyers looking to stop significant amounts the way Newedge did in the May contract.

I'm not trying to fight the trend, so I put on some long July MGEX vs KC and on the calendar. Right here I prefer to short the KC even though the HRW crop is likely to be small in the US-- I still think that there will be quality issues on the July KC deliveries (the last delivery month before contract specs are tightened) and I don't like shorting July CBOT at levels so close to corn.

Still Trying to Be Nimble

Flat on MGEX wheat futures now.

Looking at the calendar spreads on KC and CBOT, I put on some short July/long Sep KC and some short Sep/long Dec CBOT. In the former, the trade is beyond full carry, but I think the changing contract specs for Sep will drive that spread to further contango. In the latter, we are still a long way from full carry and it doesn't look like there will be a shortage of soft winter wheat...

Mighty, Mighty MGEX

Not only did July/Sep MGEX finish at 18 cents premium July, but the rest of the calendar through July 12 traded at a small backwardation. I don't see how the supply/demand balance sheet for spring wheat points toward a market that tight right through the new crop harvest, but that's the market now.

The premium for July MGEX over KC has been varying in tight correlation with the movement on the calendar spreads. July MGEX has moved up a lot versus KC, but Dec MGEX is still only about 15 cents premium to KC--which is a bargain if the new crop MGEX spreads are predicting a tiny spring wheat harvest in September.

On the MGEX exchange front, the ICE says they are going to launch a spring wheat contract meant to appeal to Canadian interests--Canadian delivery points, perhaps priced in Canadian dollars. Seeing the poor job they've been building interest in current ICE Canada products (canola and barley), it seems a misguided effort to me. In a sane world, they would just buy the MGEX for $100MM using ICE shares as currency. ICE gets a thriving contract, they add the Canadian version if they like, and have the prospect of developing the grain index contracts--MGEX members get the liquidity event with favorable tax treatment. MGEX would certainly be more profitable immediately if it were merged into ICE.

Lots of Excitement around July MGEX

I have been noting a number of factors which pointed to tightness in the prompt MGEX contracts. The futures market seemed to just take notice over the last couple of days. Hooray!

But are we going to run out of spring wheat over the summer? No. Sure, the market will be rationing spring wheat through price, but to me that means we should see a stronger impact on intermarket spreads and maybe not so much on the calendar spreads. July MGEX traded 10-15 cents over Sep for most of the day, which is not wildly overvalued--but also not without risks. The same July MGEX traded up to over 50 cents premium to KC.

While it's possible that there will be big squeeze on July MGEX futures-it's not a very large market and perhaps there's not much deliverable wheat available--there isn't a big shortage of spring wheat in North America right now, so the calendar spreads don't seem like a great game to play at this point unless you have truly comprehensive physical market information. On the other hand, it seems to me that there is still plenty of upside on the intermarket spread versus KC. Dec11 MGEX is only about 10 cents premium to KC; if there is a sustained move to higher protein premiums, that should be a great level to buy MGEX vs KC.

Trying to Be Nimble

While I stopped trading early yesterday, I did narrow my focus a bit. I switched the long July MGEX/ short CBOT position I had to additional long MGEX/ short KC. So I have just that one intermarket spread and a long July/ short Sep MGEX calendar spread.

Deliverable stocks at Duluth dropped another 3MM bushels, so that's nearly half the deliverable stocks gone in about 5 weeks; there are only about 14MM bushels left and 606 May contracts still open after the last day of trading. It appears to me that there is a chance that supplies will get very tight on MGEX wheat.

As of mid-day today, we see July MGEX up 3 cents against Sep and 5-7 cents stronger against KC, so this trading thesis is being supported by the price action so far.

Drought Hurting HRW Crop... But We All Know That, Right?

For some time now, I have been very cautious about shorting KC wheat because of the very poor crop ratings and the likelihood of a very small harvest of Hard Red Winter Wheat that is the basis for the KC wheat futures contract. While I am still very cautious, I am beginning to think that the small crop has been factored into the price with KC futures at a huge $1.40 premium to CBOT's soft wheat futures. Sure, the drought could continue affect the KC future's crop, but it's a big world and US weather may not be the biggest driver.

Also, as I have mentioned in the past, the July KC contract also has some big negative factors to bear in mind. The full effect of the contract spec changes coming into force September 1 has possibly not been taken into account by many traders. Since only a tiny fraction of traders ever take delivery, most do not think the underlying specifications will matter much to them. However, the contract may ultimately (or quickly) gravitate to the value where buyers will actually take wheat that cannot satisfy the September specs.

Continuing Cautiously Bullish Nearby MGEX

Still maintaining long July MGEX vs KC and CBOT along with a some long July/ short Sep calendar spreads. Last day of trading for May contracts is tomorrow with 1000 contracts still open and May trading at 10+ cents premium. The market does not appear very well supplied.

For all the drought impacting the Hard Red wheat market in KC, that is trading at full carry right through September...actually even beyond full carry--most likely because of quality issues around the change in contract specs for Sep contracts. Anyway, that KC market just doesn't look as tight in the short term even if the prospects are good for tighter supply/demand balance sheets in 2012.

May MGEX Open Interest Still 1000+

May MGEX wheat futures have about 20X the normal open interest for a contract with 4 trading days left to expiration. Since volume is nearly nonexistent in May at this point, I think it is fair to assume that deliveries will ensue. This makes sense with May futures 60-70 cents below cash. The deliverable MGEX wheat stocks have been dropping rapidly since the beginning of April and this trend will now continue through May. If we continue at this pace, MGEX deliverable wheat stocks will drop to less than 10 million bushels by June...with several months to go before any new Spring Wheat arrives.

There is no similar inventory or strong cash basis story on either KC or CBOT. They have their own bullish stories, but not nearby inventory stories. So I am continuing to bet on the MGEX to be the best performer of the three.

No Patience...

Though I would prefer to wait to see April economic data from China to see if Asian demand is slowing generally, I just like that July MGEX wheat too much to wait. So I took small positions long MGEX against KC and CBOT.

With May MGEX trading at more than 10 cents over July, there is a tightness in MGEX wheat that will cause it to perform well right through the new crop September deliveries.

What Would I Like to See?

To get me back in the market-- right now-- I would have to see MGEX wheat around 30 cents cheaper versus either KC or CBOT. And that's assuming all the weather and supply fundamentals are still the same. Then I would buy MGEX on an intermarket spread. Or I would buy an MGEX July/Sep calendar spread at a 10-12 cent contango. That's about it. Highly risk averse right now.

Still Waiting for Inspiration

Fascinating as the wheat market always is, I am also trying to understand whether the sharp downturns in other commodities, obviously silver and other metals, but also cotton, sugar and so on, will have an impact on wheat futures.

For now, watching and waiting.

Must Be Some Ugly Conditions in Kansas

July KC wheat futures strengthened on the calendar spreads and strengthened sharply on the intermarket wheat spreads. Whether this is due to worsening crop conditions in the Hard Winter wheat growing areas or just some market noise only time will tell...but it was enough to shake me out.

Will take a fresh look at the whole grain market in the morning.

Bullish Calendar Spread Action on MGEX

Here on the first delivery day for May MGEX wheat, we see the May contract trading at a strong 8 cent premium to July. July, in turn, is 2 cents premium to September. Backwardation! Every bull's favorite term structure.

KC and CBOT May contracts are trading at steep discounts to July -- and July at even greater discounts to September. Part of this is the regular seasonal pattern where the new crop for MGEX doesn't arrive until September, but weather concerns and quality concerns on KC and CBOT are also playing a big role. So I am pressing on with my long July MGEX/short KC and CBOT intermarket spreads.

No Love for Wheat Today

Very sharp move lower in wheat markets today, led by KC wheat. Works for me.

It was interesting to see July/Sep KC wheat move beyond what I see as a full carry contango. If July KC is at more than 16 cents discount to Sep, then I think it is very likely that the market is factoring in quality issues on July contracts.

Full financial carry on July/Sep CBOT has a lot of moving parts, but if storage rates stay the same, then it would be about 43 cents. If the spread averages something like 44 cents in the weeks approaching July delivery then the storage rates bump up again, and full carry will be pushed out toward 50 cents. The July/Sep CBOT is now 45 cents.

Both the KC and CBOT July/Sep calendar spreads contrast sharply with the MGEX situation--though slightly softer, July again closed at a premium to Sep on the MGEX.

July/Sep MGEX Shoots to Backwardation

I have a hard time believing that supply will really be that tight come July...but I also have a hard time believing that the cash DTN index for Hard Red Spring wheat is more than 50 cents over May futures and yet it's been there for some time now.

The biggest problem trading the intermarket spreads at the moment is that each has a bullish story and the stories are all quite different. We got lucky that there was some rain in the Hard Winter Wheat areas to dampen the bullish story there and help our long July MGEX vs KC position. There are still other drivers that could increase the MGEX premium to KC and we saw some come into play today as July/Sep MGEX inverted (to July premium) while KC July/Sep pushed out to 100% of financial carry. I have noted in previous posts that KC July/Sep would be subject to the extraordinary factor of a contract spec change on the Sep contract, so that can go well beyond 100% of normal financial carry charges.

MGEX July/Sep Indicates Some Tightness

If markets are any good at rationing demand through price, then the July/Sep MGEX calendar spread trading in close to even money should be a strong indicator that supplies of July hard spring wheat are going to be fairly tight. While there are many supply concerns around the KC hard winter wheat based on the poor growing conditions so far, there are reasons to avoid holding the July KC contract: 1) even a small crop will add to the current full-carry inventory, and 2) July KC will be the last best chance for elevators to rid themselves of grain that won't meet September 1 contract specs (though it's possible that elevators could rid themselves of poor quality inventory through careful blending, that would take time and expense).

So, yes, I like my long July MGEX vs KC position and added to it today.

Wading Back In

Spent the day buying dribs and drabs of MGEX July and Dec vs both KC and CBOT. It's hard to express exactly why. Perhaps because the July/Dec MGEX looks far more bullish than any CBOT or KC calendar spread. Perhaps because cash Hard Red Spring wheat continues to trade at large premiums to all both hard and soft winter wheat. We'll see how it works out.

Could Be a Long Breather...

Soft Wheat is perhaps now supported by parity with corn. Hard Red Winter Wheat is supported by current lousy crop conditions. And Spring Wheat is supported by the big premiums being paid in the cash market. I can see any or all them as bull markets, but they've all been trading down recently. So I'm not too comfortable with any spreads among the bunch.

Taking a Breather

What Do I Know?

I decided that I've been over-thinking the intermarket spreads lately; who knows where the July MGEX/KC spread will go? I don't like the July KC contract, but it's entirely possible that all the negatives I see will be reflected in a weak basis for cash vs futures and KC futures will skyrocket. I'm not willing to bet on it right here. So I squared up my positions.

Will try taking a fresh look at things tomorrow without being under the influence of an existing trading position.

If Wheat Is Falling, Why Are Calendar Spreads Narrowing?

As I type, CBOT wheat has dropped about 50 cents in 48 hours. But over that period, May/July has tightened from May at 36 cents discount to only 32. So if the nearby supply/demand looks tighter, why is the market dropping? I have to guess it's because other commodities like oil (down $7/bbl over the period) are influencing macro and portfolio investors.

The same dynamic applies to MGEX as well. While there has been a steep sell-off in the outright market, the May/July spread is less than 60% of full carry--and July/Sep is nearly at even money.

Big Moves in Wheat Intermarket Spreads

And the big moves do not appear to be related to any particular news...just market gyrations. The MGEX vs CBOT spread has crashed 40 cents in 3 days. But I said last week (at the highs) that there was certainly room on the downside. On the other hand, MGEX vs KC has only fallen back to the levels we saw at the lows last week. So that was indeed the lower risk spread. So where from here?

If all wheat is now going to be viewed as a potential substitute for precious, scarce corn --that seems to be the source of support for CBOT wheat, though it's really just a plausible guess-- then the MGEX premium to CBOT could shrink further, even a lot further. But the 10-15 cent premium for July MGEX to KC looks cheap even from that point of view. And Dec MGEX at a discount to KC? Would anyone really want a long-term position betting that KC will go to, and stay, at a premium to delicious, 13.5% protein HRS wheat?

Where from Here?

Friday's trading saw both a market reaction to bearish news in corn and step toward normalization of intermarket spreads in wheat. While traders that are long corn futures seems relatively undisturbed by Friday's WASDE report, corn underperformed other grains and commodities in general. On the whole, the bullish prospects for the new crop still shine and there isn't that much old crop left.

In the wheat market, a dramatic drop in the premium for KC over CBOT was the feature of the day. A little precipitation and a little extra inventory in the WASDE and the KC futures took a big hit. I am not a bull on the July KC against anything. For a lesson on how the changing contract specs can affect a futures market, just take a look at July/Sep rice. And while new crop CBOT wheat is going to be very well supplied, it is already very cheap--practically even with corn. So there is support there that KC will not have.

The main opportunity that I saw Friday was that July MGEX dropped to below $1.30 premium to CBOT. Given that there may be continued pressure on the above-mentioned KC/CBOT spread, I decided to wait and see if that gets cheaper before jumping in.

Haven't Really Traded for Two Days

The long July MGEX/ short KC spread has been drifting mostly higher, it was running about 15-18 cents premium MGEX today. I tried to jump in at the close and buy some July MGEX at $1.40 over CBOT but only got a couple before the bell.

Calendar spreads are still hanging around the same levels as when I rambled on about them a few days ago...

The trade I missed was the $105,000 MGEX membership--I wanted that one. But stepping back, I have to admit that over the 15 months since I first got involved in MGEX, the memberships have appreciated precisely 0%. Obviously, if I had it to do over again, I would go with the dividend paying KCBT membership.

Back to the Intermarket Wheat Spreads

Apparently, I couldn't stand the easy life being long July MGEX/short CBOT wheat, so,as I mentioned last week, I have been shifting to long July MGEX/short KC. While the trend is certainly strong on the former, I think there will be less volatility and better value in the latter.

I'm as bullish on July MGEX as anyone, but being short July CBOT wheat which is nearly even with corn doesn't seem risk free. And we were around $1.50 premium for MGEX today, so while that could be a lot higher, there could be more than a few cents on the downside.

Compare that to owning MGEX at 12-13 cents premium to July KC. Could it go to a discount? Sure. But I don't see MGEX staying at a discount. There won't be any shortage of hard red winter wheat in the first new crop month on KC. On the other hand, old crop July MGEX is nearly even with new crop September. Throw it the usual protein premium for MGEX and the changing contract specs for KC (July will be the last chance to deliver low-protein, high vomitoxin wheat on the KC) and everything I see favors MGEX.

A Little More on Wheat Calendar Spreads

The CBOT, like the KCBT, is adjusting its contract specs for the September contract with respect to vomitoxin levels. From the CME SER:

The vomitoxin level for par delivery in the July 2011 contract, 3 ppm, will be deliverable at a 12 cent per bushel discount in the September 2011 contract...Because of this change in value, the 2011 July – September Wheat spread may expand (September increase relative to July) up to 12 cents per bushel beyond the quantity of the spread absent the change in vomitoxin specifications.

The CME goes on to say that they are adjusting the July/Sep VSR calculation to account for this "extra" premium for September contracts which is not due to storage, but due to quality difference. As far as I can see, the market has not allowed for anything like 12 cents difference in quality; possibly, this is because there is no grain in storage that is over the September limits, but that seems unlikely to me. I believe the additional premium for September contracts may apply just as much (if not more) to the KCBT as the CBOT, since they are making a similar change in delivery terms, though I don't believe that anything over 2 ppm will be deliverable against KC at any price.

Some Thoughts on the Wheat Calendar Spreads

A few months ago the KCBT finalized changes in their wheat contract that will take effect with the September contract. As I look at the contract specs, I think full carry for July/Sep is about 15.7 cents using 3% for financing. Previously, I had thought the carry was 18 cents plus financing, but reading the KCBT rules, it seems the higher storage rate does not take effect til September 1.

There is another change to the rules that takes effect in September and that is a tighter restriction on acceptable levels of vomitoxin and protein. So if you are running an elevator that is regular for delivery you need to dump all the wheat that will not comply with the new regulations before September 1.

If you are just a financial participant, the actual quality of the underlying wheat should not impact the value of the shipping certificate. But if you are looking at loading out wheat, you would apply some premium, perhaps substantial, to the September contract over May or July due to quality.

Why All the Love for KC Wheat?

As I reduce exposure to my long July MGEX vs CBOT position, I have added dribs and drabs of long MGEX/ short KC. At first I bought some Dec MGEX at 10 cents over KC. Then looking at the potential for steeper contango in the KC market (their storage goes to 9 cents/month starting in July, while MGEX stays at 5 cents), I decided that buying July MGEX vs KC was more attractive--especially at today's 16-18 cent premium for MGEX.

Is the Hard Red Wheat crop in bad shape? Sure. Is there going to be such a shortage of it that KC goes to a premium to MGEX? That may happen, but it won't be strictly due to an actual shortage. The KC futures are trading at over $1.00 premium to cash, while MGEX futures trade at a substantial discount to cash. So I think the July MGEX will stay at a premium to KC, these cash/basis relationships bear watching...

A Little Less Baggage Going into the Report

I took advantage of the rise in the July MGEX premium to CBOT up to 1.33 to reduce my exposure going into tomorrow's USDA report. I still have more than half of the position, and I also have a little more flexibility.

Here Comes the Crop Report

MGEX wheat looked like it would be the best performer at the open today, opening 3-4 cents stronger than KC or CBOT, but gave most of that back by the close. In fact, by the end of the day, MGEX was lower against the KC while maintaining gains against CBOT. My guess is that these movements are nearly random as market participants adjust toward the positions they want going into the USDA numbers coming out Thursday.

Being long May/short July MGEX was a thorn in my side today as the spread drifted toward 10 cents contango. Well, that stinks.

Though I don't have any position, the July/Sep rice remains interesting with a 17 cent range over the last 2 days. Since May/July has had only a 1 cent range, it seems clear this is not about supply/demand of rice, but about the particulars of the warehouse receipts and the new contract specs.

Staring Blankly at the Screen

Didn't come close to doing any trading today. July MGEX/CBOT spread continues to push the high end of the range around 1.22-1.24 premium, but certainly no desperation showing. Market is still comfortable with May MGEX at around 8.5 cents discount to July. I don't know how to reconcile that with the premiums paid for cash Hard Red Spring wheat...but there it is.

With corn futures falling over the last 2 days, there has been a modest bounce in the values for oats and wheat vs corn, but it is too little and much too late me on those trades. In retrospect, perhaps I should have been more cautious on those relative value trades, since the valuations were only attractive on the old crop corn. In other words, the rolling the short corn positions forward was always going to be very painful, so time was not on my side. And when you're putting on a "mean-reversion" trade, you really want time on your side.

The Wrong Trading Strategy...

For a couple of weeks the intermarket wheat spreads have been oscillating around the same levels. For those two weeks, I have been looking for MGEX wheat to break out to stronger levels against the CBOT and the KC. It's been frustrating.

The thing is...it's pretty hard to take 1-2 cents out of the market on these spreads. If they move against you, the losses can be substantial ---and even if you have just the right day-trading idea, the execution slippage and brokerage can eat up a fair portion of the profits.

So while it would be great to pull a few cents out of the market when the MGEX/CBOT spread trades in a 5 cent range for a few days, for me the risk/reward isn't good.

The Price of Indecision: 5 Cents.

As I mentioned yesterday, I want to put on some long July MGEX wheat / short KC for similar reasons to my positioning in MGEX/CBOT. The carry cost for KC goes up starting in July to 9 cents/month while MGEX stays at 5 cents/month. Also, cash Hard Red Spring wheat is about $2.00 over Hard Red Winter wheat, so I think time is on my side buying the July MGEX at only a bit over 30 cents/bushel premium to KC...but I could have had it yesterday a nickel cheaper.

Sure, the risk is still there, but I don't have to hold it for 20 cents against me, I can exit sooner if i like (hopefully).

Wheat Update and Some Chat on Rice Futures

I topped up the long July MGEX vs CBOT intermarket wheat spread yesterday at the dip on the close. And over yesterday and today, continued to liquidate, painfully and reluctantly, the short corn positions against CBOT wheat and oats.

I started to put on a long July MGEX/short KC wheat position today but was too shy to pay much over a 25 cent premium for MGEX. I only got a little bit and then I took the day-trade profit as the premium neared 30 cents. There is a similar case for this position as my current MGEX/CBOT spread. The reason I lost my nerve on this is that it concentrates too much risk on the MGEX contract when added to the existing positions.

Considering the turmoil and fighting in the Middle East and North Africa along with the ongoing disaster in Japan, it's surprising there is so little volatility in commodity markets over the past few days...

Though I try to stay focused on wheat trading in this blog, I have been doing some trading in CBOT rice and it's been... ummm, fascinating. The basic story is that March/May rice traded out to full carry and I thought I could make a little extra by taking delivery. As I got more involved in watching the spreads in rice, the July/Sep spread went to what appeared to be shocking levels for the carry trade. It took a couple of weeks for me to hear back from the exchange after I asked about changes in contract specs (and google searches didn't help). Anyway, there are new specs going into effect there on September 1 which will impact the valuation of warehouse receipts from the Sep contract onwards--though it won't affect the eligibility of any receipts. The effect will depend on the particular receipts with the highest quality specs being hit the hardest --something like a 4% hit to the values there. So everyone should be trying to unload their high quality rice receipts before September, because after that you won't get nearly as much premium for the the "head count." My guess is that the July/Sep spread there could be quite volatile since the worst case pricing is around 95 cents premium Sep, but there is no certainty over the receipts you could get. The typical receipt would be worth about 40 cents less if delivered in September, so that would put the July/ Sep spread at around 70 cents for full carry.

Loving that MGEX Wheat

The May MGEX wheat pushed up toward $1.50 premium to CBOT today-- though it is still far short of the cash DTN index difference between Hard Red Spring and Soft Red Winter which has been over $2.70 for some time now. I added more to that position today.

The calendar spread on MGEX have been more challenging--which means I've been losing money. The history I've examined makes it seem unlikely that the May/July spread should go to a full carry contango while the cash DTN index for Hard Red Spring Wheat is at a premium to May futures, but that seems to be where we are headed. Still there are only a few cents of downside left and the upside looks substantial, so I'm keeping these spreads for a while.

Long oats and CBOT wheat vs short corn have been pared back a little, but these spreads continue to cause pain. Just have to be small enough to stay in the game, and big enough to make a difference...I'm not sure there's a balance there, but I'm still holding on.

Didn't Trade Today Either

Didn't Trade Today

Just holding tight.

Nothing's Going My Way...

...but I'm not losing a whole lot of money. May CBOT wheat vs corn traded down to new lows, so I lightened that position, but on a small position to begin with, and getting in at less than 60 cents/bushel premium for wheat, that's not a lot of damage. Oats traded soft against corn today, but with the front months limit down, there really wasn't much change there either. The long May/short July calendar spreads have sagged toward full carry, but that's not much of a move either.

On all these positions I am fighting the trend. Usually a mistake, but if you're patient and not too leveraged, it can work. I think.

The main event for me, the MGEX vs CBOT wheat spread has been stuck in a 10 cent range for quite a few days now. Given that the cash Hard Red Spring wheat is $2.75 over Soft Red Winter, and that the July MGEX futures are consolidating around $1.10 to $1.20 premium, I'm hoping the next move is a continuation higher on the premium for the good, hard wheat.

Still Hanging with Corn Shorts

On a side note, I would have guessed that an earthquake that destroys inventories and rice plantings would be bullish for rice prices, but CBOT rice was down 4% after the news. Further, the calendar spreads reflected almost no change in rice demand or supplies... amazing.

Now Clinging by the Fingernails

Only a very late sell-off in corn helped me keep my composure and hold my wheat and oats vs short corn. If corn goes to a premium to wheat in the cash market, I guess I will look to exit. Sure there is a low stocks-to-use in corn, but that's been known for months now. Also, if the market for May corn is so tight why is the May calendar spread trading at 7 cents under July today when 10 days ago it was only 2 cents under July? The 7 cents May/July in corn does not look significantly tighter than the 7.5 cents for May/July oats.

The USDA finding 25 million bushels of HRS wheat did not help my long MGEX vs CBOT position at all: the July spread dropped from around $1.20 to maybe $1.12 at the close. Also the additional inventory news pushed the May/July contango to 8 cents from 6.5 cents. Very sad for me, but it does point out the importance of controlling risk. I don't think I've ever been as bullish on MGEX wheat as I was yesterday. Huge premiums for HRS in the cash market, MGEX futures had pulled back to less frothy levels... then the USDA finds 25 million bushels ...

Clinging to Short Corn Positions

I bought a tiny long CBOT wheat/ short corn position today as the wheat premium declined. Also held on to a smallish long oats/short corn position. I was expecting the oats to underperform in a bull market, but I am surprised that oats are losing ground in this sell-off.

I did have to venture back into the long July MGEX/short CBOT wheat position today--and at higher levels than I exited yesterday...

Taking a Breather...

Still looking to keep risk under control, I took off the remaining long July MGEX/ short CBOT position. Just keeping the long March/short May MGEX calendar spread for now. It's not that I don't like the prospects for July MGEX widening over CBOT, it's just too much downside--I probably should have kept at least a little.

Risk Management Day

I like MGEX wheat, but where to take the risk?

I think being long May/ short July MGEX is very low risk (maximum loss about 5-6 cents/contract) but although DTN cash indexes show cash Spring Wheat at a premium to March futures, that hasn't pulled MGEX March/May into backwardation. So low risk, but perhaps also a low-percentage chance of a positive payoff.

On the other hand, July MGEX is $1.17 over CBOT, while their respective cash markets show $2.50 premium for the hard wheat. So here there is a high-percentage chance of a positive payoff by being long MGEX vs CBOT--time is on our side here. But the downside risk is very substantial: less than a month a ago that premium was only 80 cents and we could easily see that level again.

So I've been trying to take what the market gives me. Friday I took off some March/May calendars spreads at a profit. Today I added to the calendar spread position and reduced the July MGEX vs CBOT position as the MGEX premium expanded almost 10 cents on the day at one point.

Sliding Along the Forward Curves

Like a moth to a flame, the front of the MGEX wheat market was drawn higher by fresh highs in the cash market. This pulled the MGEX higher on the intermarket spreads vs CBOT wheat as well, though not dramatically; even with cash Spring wheat at $2.45 premium to Soft Winter wheat, July MGEX traded mostly around $1.10 premium to CBOT.

While oats failed to improve vs the pricey corn market, CBOT wheat gained about 2% vs corn. I know that the nearby wheat is very cheap compared to corn, but I am happy scaling out of my long CBOT wheat/short corn position without being too greedy. This is an old crop spread where the inventories are what they are and corn inventories are much tighter than soft wheat stocks.

Running for Cover

Well, walking fast toward cover anyway... Took profits in oats vs corn as corn showed renewed strength. Stuck with long CBOT wheat /short corn.

Over the past few days I have been able to build a good position long July MGEX/ short CBOT. Taking into account the calendars spreads I have, it is more like long May MGEX/short July CBOT. It hasn't done anything for me over the past couple of days, but the front end of MGEX looks very strong with March bid at only 5.5 cents under May (only about 45% of full carry) and cash Spring Wheat at almost $2.50/bushel over soft winter wheat. So while it is entirely possible that speculators push July CBOT up faster then MGEX, I feel like time is on my side.

Down Day for Corn

While trying to pick the top in corn seems like a crazy way to try to make a buck, I added to small winning positions in oats vs corn and CBOT wheat vs corn.

Cash soft wheat is less than 5% premium to corn and cattle don't get to eat bagels very often. As I understand it, oats at less than 55% of corn are economic to feed to almost any livestock, so I think it may be a combination of bagels and porridge for the cattle and swine instead of Fritos and Cap'n Crunch.

The World's Least Surprising Trade

With DTN cash index Spring Wheat at $2.38/bushel premium to Soft Winter Wheat, I just have to have the long July MGEX wheat/short CBOT at only $1.05. The new crop of Winter Wheat will be in, and the Spring Wheat supplies may be running low...and yet the market thinks that CBOT will strengthen against MGEX. While stranger things have happened, I like the odds on this.

Also jumped back into the calendar spread on May/July MGEX (long the front month), since the cash index at 30 cents premium to March indicates a very tight supply situation.

Corn, Corn, Corn

All the most interesting spreads involve corn. Oats, CBOT wheat, ethanol: they are all very cheap against corn. "Synthetic feedlots" show losses on feeding corn to cattle.

In the case of real feedlots and ethanol plants, it doesn't seem they have the profit margins to continue high rates of corn consumption. In the case of oats and soft wheat, demand seems very likely to grow from substitution demand replacing corn.

Any trade involving shorting corn will will going against the trend and market sentiment toward corn and, therefore, must be done will low leverage, great caution and patience.

In wheat, the long March/short May calendar spreads never worked out for me. Still, I am looking at taking a similar position in the MGEX May/July. The cash market is at a strong premium to the March futures and when we have seen that in previous years, it has been accompanied by a move to backwardation in MGEX futures.

Staggering Along

That is, I'm staggering along sick. All grain positions liquidated. Lucky escape on the intermarket spreads as the July MGEX premium to CBOT dropped 35 cents over the course of the week--Not that I sold at the top, but it could have been worse.

The calendar spreads never worked out. This is the last post til March. No trading through school vacations. If it weren't for the enforced vacation, I would hold the calendars spreads, March/May, on KC and MGEX right up to next Friday to see if anything happens...but that will not be the case.

Corn continues to outpace oats and ethanol...March CBOT wheat is trading at less than 1.2X March Corn. The wheat looks pretty cheap there, but would have to be trading at less than 1.2X a bit farther forward to lure me in; it's tough to go long CBOT wheat on a relative value basis when the cost of carry is around 7% to July for wheat and only 2% for corn...and then the wheat harvest arrives

Corn Stops Here

Not a dramatic "outside day" in corn, but close enough for me. Market appetite for high-protein MGEX wheat futures also evaporated toward the close. So if corn might correct down in price (shaking out some of the 500K longs), and with the lame CHINA DROUGHT stories failing to get much traction (most the crop is irrigated, no?), grains look like they may settle back a bit for a while.

I went to flat on intermarket wheat spreads and the long March/ short May calendar positions don't have much shelf life left either.

Winter break next week.

Missing Post

I put up a post last week on getting back into long MGEX/ short CBOT--I don't know where it went. Contrary to last summer's dynamic, this intermarket spread seems to be performing these days as a bull market spread...and this is a bull market.

Nothing Can Keep Pace with Corn...Revisited

Well, I blew out of my various relative value trades that involved shorting corn. Today the USDA lowered projected corn stocks mainly due to higher ethanol use, but it turned out to be more bullish for corn than ethanol. Chucked the oats out as well. Could have been worse: oats are about 10-15 cents stronger vs. corn than they were back on 20 Jan, but I've had enough.

Back to my bread and butter, I am creeping back into long July MGEX against CBOT. It's hard to have a whole lot of conviction at $1 premium for MGEX, but with the March trading at $1.40 premium and the winter wheat harvest a lot closer than the spring wheat harvest, it seems like the way to go.

Watching MGEX Calendar Spreads

I tweeted Darin Newsom of DTN/Progressive Farmer pointing out that cash Hard Red Spring Wheat has gone to a premium to the March MGEX contract and that the development seemed bullish to me. He tweeted back that while it did seem bullish, the cash has averaged even an higher level than this relative to futures over the past 5 years. While that is true, there was a very large backwardation in the March/May MGEX calendar spread in several of those years.

Still watching and waiting.

Waiting Through the Goldman Roll

If I were really patient, I would have waited til now to put on the long March/ short May calendar spreads....but I'm not patient. Actually, it shouldn't have much impact on the MGEX at all since there are so few index longs. But with CBOT sliding out toward 32 cents carry from March to May, it's not likely to inspire anyone to grab MGEX March contracts at only 10 cents discount to May.

Adding a little to short corn trades: I added long March ethanol/ short corn today with the ethanol crush at the lowest levels in a long time. According to the CME's Ethanol Outlook, profitability is very low in the industry even with high DDG prices. If anyone has a good source of DDG prices, I would love to hear about it.

Wrong and Wrong Again

Dumped the balance of the long MGEX vs CBOT intermarket spreads I had. Still like the long March/short May calendars in MGEX and KC and there's not too much downside from here.

On the MGEX memberships, the seller was Urbana Corp, the Canadian closed-end fund that owns shares in a variety of publicly owned and privately owned exchanges. Urbana had about 10% of the MGEX equity with 42 seats, so while this sale of 15 seats raises $1.8 million, it leaves them with 27 seats. The buyer was a private equity firm, Croupier Prive, that is not known for activism.

A Block of MGEX seats traded at $119K

I don't know if it's bullish or not...would the seller have been Gary Weber? Any thoughts?

Whacked

Everything associated with the strength of Minneapolis Wheat gave back ground, especially the March/May spread, but also the intermarket spreads. On the intermarket spreads, I cut back some because they are too volatile to wait and see with a large position. But with the calendar spreads, it will take more than a day's weakness to change my mind.

A Quick Re-Think

A couple of days ago I thought it was best to liquidate MGEX March/May wheat spreads because they would move from 60% of full carry out to 90%+ of full carry. However, as the cash/futures basis continues to narrow, with cash only 4 cents discount to March futures, I think there the risk/reward for long March/short May has changed. Now there is a real chance that March can go to a premium to May.

While the elevators have not been emptied, it appears that buyers are bidding their way to the front of the line--even though there is plenty of inventory, there appears to be competition to secure the physical. If cash goes to a significant premium to futures, it becomes very likely that the front end of the futures curve will be pulled higher.

The Cupboard is Bare

Took profit on balance of intermarket spreads. Just carrying nearby calendar spreads in KC wheat and a some March/May Rice. I don't see any shortage of either, but judging by the huge outright price rallies, there are enthusiastic buyers somewhere. I think both spreads are very close to full financial carry. KC wheat March/May could go to 12.5 cents and Rice might go to 31 cents; against that there is the small chance that there is a sharp flattening of the contango as buyers demand the prompt month.

Oh yeah, and still hanging on to long Oats/ short Corn...

Almost Out

Liquidated 80% of long MGEX intermarket positions today. If the MGEX market goes parabolic to the upside, it will look pretty dumb.
Also liquidated long March/short May MGEX--it looks to me like it will go to at least 80% of full carry; KC is already at 90%.

The Opposite of Pyramiding

While trend-followers often add to winning positions, relative-value traders usually scale-in and scale-out. I am gradually exiting my long MGEX/short CBOT position. It's great to have gains, but the market seems to be getting more volatile and smaller positions are more appropriate-- in addition to the prospect that MGEX is more "fully valued" at these levels.

MGEX Premium Revisited

It's been 2 weeks since I've commented on the MGEX premium to the CBOT. Over that period I've crept back into long MGEX positions against CBOT and KC. Today, I began to reduce the exposure to MGEX/CBOT. The cash Spring Wheat is still at a large 180 cent premium to Soft Red Winter Wheat, but the March MGEX traded up to 120 over CBOT and the other 60 cents might not be recovered if the CBOT basis remains at the current 75 cent discount for cash to futures.

There still seems to be a disconnect between the extremely bullish price action in the outright wheat prices and the relative calm in the calendar spreads. MGEX March/May has been at about 60% of full carry (using 2.25% finance), but the KC and CBOT have been out at 80-85%. In contrast, over in the soft commodities which have had similar rallies over the past 8 months, the nearby calendar spreads are generally in backwardation--sugar, cotton, cocoa all inverted with only coffee in contango.

Didn't Trade

Mostly all the recent trends continued. Hard wheat strengthened vs soft.

Interesting Calendar Spreads

The futures markets seems to be anticipating tighter supplies ahead, but is not at all worried about the short-term. For example, May/July MGEX wheat is at even, and July/Sep Rice is in backwardation, yet in both cases the nearby March/May is headed to full carry.

There's nothing wrong with that, but given the extremely bullish price action recently in both wheat and rice (along with corn and beans), long March/short May looks like a very cheap option to play the upside.

Big Money in Farming!

http://www.youtube.com/watch?v=_pDTiFkXgEE

It's the Hard Knock Life..Shorting Corn

Ok, I need to forget ethanol/corn for a while...maybe until crude is over $110/bbl and people will pay up to burn anything. I'm out of that, but holding on to oats vs corn, for now anyway.

New planting estimates seemed to have had an impact on the calendar spreads with new crop wheat looking scarcer. Calendar spreads scraped themselves off the floor, but not much impact at the very front- March/May.

Watching and Waiting

Added a little to the calendar positions-long March/short May in MGEX wheat and CBOT corn.

After a lower opening wheat and corn both rallied, so positions based on a trend reversal in corn are on shaky ground.

Jumping Back into Ethanol

Amazingly, after examining the reasons for losing on the last ethanol/corn spread, I felt compelled to get back in the same trade today. It is mentally much easier to get back in at better levels and the ethanol is around 4 cents cheaper than when I got out, but that's not really the idea. The idea is that Corn staged a reversal today and speculators have a lot of corn to sell if it trades lower. If corn turns back higher, I think I can be nimble enough to exit without much of a loss.

Let's Look at a Loser...

While it isn't too surprising to me that my ethanol/corn spread trade lost money as corn rallied to new highs, looking at it more closely I think there was more going on than just speculators distorting that relationship. Trading ethanol versus corn is just an approximation of the actual economics of the ethanol "crush." The main factors left out are the price of power (natural gas can be a proxy) and the DDG produced along with the ethanol. Usually the ethanol produced accounts for the vast majority of the value of the corn products (over 85%), but with the run-up in corn and high prices for cattle, DDG prices have rallied sharply now accounting for 20% of the value of the crush.
So with DDG so well bid, ethanol producers producers can hum along with lower margins on the corn whiskey...
For some reason, the CME still publishes closing prices for their (zero open interest) futures on DDG at $112.80/ton (Feb) while DTN says cash markets are over $185.

Nothing Can Keep Pace with Corn

Both Ethanol and Oats were about unchanged on the day as Corn rallied a further 2%. I dumped the ethanol position. For now, I will keep the Oats. Maybe the oats resistance at $4 will break or maybe corn turns lower... I don't think I will keep this one if it doesn't turn around quickly.

Just as I usually add a "tail hedge" on intermarket wheat spreads, in retrospect, I should have carried a bit more on the Ethanol and Oats longs than the Corn shorts to account for the higher corn volatility.

As DTN's Hard Red Spring index for cash markets hits $1.65 over Soft Red Winter, I had to jump back in the long MGEX/short CBOT spread--this time with July MGEX at 73 cents premium.

MGEX Premium Stays Strong

I happily exited most of my long MGEX/short CBOT position today....why? Because I fear that CBOT will outpace MGEX in a rampant bull market. Those fears are likely misplaced, but after the experience last summer, better safe than sorry.

The nearby calendar spreads on the KC and MGEX stayed out at elevated percentages of full carry. CBOT, however, could see March/May widen out to 32-35 cents premium for May, so there's still some room in that spread from the current 28 cents. I remain surprised at the disconnect between the bullishness on the outright market and the lack of interest in holding the front end...