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...

Re-Weighting Rolls On...

Re-weighting conting to pressure the CBOT wheat contract, today driving the MGEX March premium to $1.05. While the CBOT gets sold off on the closes (since last Friday), the cash Hard Spring Wheat market looks very strong narrowing the cash/futures basis and moving to over $1.50 premium to Soft Red Winter Wheat. Sweet.

Calendar Spread Puzzler

I can't figure out why there is so much pressure on KC March/May right now. The KC future is strong on an intermarket basis relative to MGEX and CBOT, but is the least "wanted" on the calendar spreads. While it is entirely reasonable to figure that March KC will go into delivery at 100% of full carry, it isn't at all clear why it should get to that level now--or before MGEX and CBOT.

Re-weighting of the GSCI is keeping the pressure on CBOT Wheat and Corn ahead of the big USDA report this week. I don't know if I will keep the Ethanol and Oats trades on through the USDA report. But at least for another day.

GSCI Re-Weighting: Trade of the Day

The CBOT wheat sold off about 7 cents over the last minute driving the spread against MGEX to new highs.

KC wheat spreads still available at 80% of full carry for March/May--and that's using 2.25% for financing (though no delivery charge). This is an essentially free option on wheat tightness.

The GSCI re-weighting had less impact on Corn, though a strong close in Feb ethanol puts that trade near the top end of its recent range.

Adding to KC Calendar Spreads

Since I think the bottom for KC March/May is around 12.5 cents (premium May) and more likely only 11.5 cents, I added to my calendar spread position today--though i didn't get many at 9.75.

Just holding on to the long MGEX vs CBOT.

Not So Busy Here...

At least not busy in wheat. I have my long MGEX intermarket spreads and they are performing pretty well for now.

I thought I was smart being long Oats vs Corn, but that fell back today. If anyone knows why, I would appreciate a comment.

GSCI Re-Weighting at End of Week

MGEX wheat has been stable against CBOT for a few weeks now with a premium mostly in the low 80 cents/bushel for March futures. With the cash market for Hard Spring Wheat at around $1.30 premium to Soft Red Winter and the carry costs much higher for CBOT, there should be pressure to increase the March MGEX premium. Also, the annual GSCI re-balancing starting Friday should put further downward pressure on March CBOT. The re-balancing should also serve to depress Corn relative to Ethanol and Oats which are not in the GSCI index. (Wheat and Corn outperformed last year and so are currently overweight in the index and will be reduced.)