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...