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.