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...
Thursday, March 31, 2011
Wednesday, March 30, 2011
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.
Tuesday, March 29, 2011
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.
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.
Monday, March 28, 2011
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.
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.
Friday, March 25, 2011
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 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.
Thursday, March 24, 2011
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).
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).
Wednesday, March 23, 2011
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.
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.
Monday, March 21, 2011
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.
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.
Thursday, March 17, 2011
Wednesday, March 16, 2011
Tuesday, March 15, 2011
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.
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.
Friday, March 11, 2011
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.
Thursday, March 10, 2011
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 ...
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 ...
Wednesday, March 9, 2011
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...
I did have to venture back into the long July MGEX/short CBOT wheat position today--and at higher levels than I exited yesterday...
Tuesday, March 8, 2011
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.
Monday, March 7, 2011
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.
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.
Friday, March 4, 2011
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.
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.
Thursday, March 3, 2011
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.
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.
Wednesday, March 2, 2011
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.
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.
Tuesday, March 1, 2011
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.
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.
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