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.
Thursday, July 28, 2011
Wednesday, July 27, 2011
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...
Hmmm...
Monday, July 25, 2011
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.
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.
Wednesday, July 20, 2011
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.
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.
Monday, July 18, 2011
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.
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.
Wednesday, July 13, 2011
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.
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.
Friday, July 8, 2011
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.
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.
Thursday, July 7, 2011
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.
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.
Tuesday, July 5, 2011
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.
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.
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