MGEX-Mania!

I have been bullish on MGEX wheat (vs CBOT) since I started keeping this journal 18 months ago. But apparently I am not the most bullish cheerleader--I sold out the balance of my MGEX intermarket spreads.

The USDA numbers certainly favored Hard Red Spring wheat over any of the other main varieties...but by how much? The large premium for Dec11 over March12, now near 50 cents seems to be more of a delivery game than true demand for higher protein wheat. The premiums for 14% protein wheat at Kansas City do not appear to support Dec MGEX at 1.87 over KC or 2.85 over CBOT.

Further, the squeeze on MGEX does not seem to extend very far out the futures curve. While Dec is 50 cents over March, May only commands 12 cents over July, so there is some implication there of a short-term phenomenon rather than a new long-term structure to Hard Red Spring wheat pricing.

Eventually, I will get back in long MGEX--and prehaps at higher premiums than we see today--but for now I will wait. I would like to see non-commercials exit their short CBOT positions before I stake out a short position there.

USDA Spins Wheat Wheel of Fortune Tomorrow

So I lightened all my positions today. The steep backwardation in Dec/Mar MGEX continues to imply a very bullish story for intermarket MGEX vs CBOT spreads--particularly the deferred spreads like July12 MGEX vs CBOT which is at $1.25 compared to the $2.40ish level for Dec11 MGEX vs CBOT.

The futures market does not seem to be able to predict USDA reports reliably. We see very large volatility on the release of USDA reports, so whether the reports are accurate or not, they have been having a big impact on markets.

The only thing I am taking into the report is a scaled back long July12 MGEX vs CBOT.

Demand for Dec MGEX Wheat

Despite lower prices across nearly all commodity markets, including wheat, the Dec11 MGEX premium to March12 rose to new highs. I am interpreting this as a signal that MGEX will continue its overall strong trend vs CBOT wheat. While only two days ago, I feared a CBOT rally, the intermarket spread levels are more attractive today.

MGEX Wheat Retreats

After briefly seeing premiums above $2.40 over CBOT for Dec MGEX and near $1.50 for July12 MGEX yesterday, the intermarket spreads swooned to around $2.10 for Dec11 and $1.25 for July12. As I was mentioning yesterday, the CBOT contract seemed prone to short-covering and as other "risk" assets rallied around the globe, the CBOT wheat contract found more support than KC or MGEX.

Maybe I should be more patient. With Dec11 MGEX still trading at 20+ cents premium to March and deliverable stocks at Duluth only trickling in, I got got back in long MGEX vs. CBOT. The closing levels looked like a bargain compared to the prevailing levels for most of the day. So maybe I will lighten up if there isn't a bounce at the open tomorrow...bargains are prices that aren't available for a long time.

Dec MGEX Wheat Up and Away...Thanks, and I'm Out

The premium for Dec MGEX over CBOT expanded from less than $1.70 to over $2.30 in 4 sessions. Taking a step back, we can see that over that 4 day period, MGEX rallied 30 cents while CBOT dropped 30 cents. While there has been some speculation that the MGEX rally is due to a smaller than expected crop coming in, the changes in the calendar spreads are somewhat mixed.

Taking a further step back, we can see that the CBOT price drop is a continuation of a month long 20% drop in the wheat market. Obviously that isn't due to expectations of a small crop. The wheat market drop seems much more due to the general commodity environment, where there have been significant liquidations of speculative long positions. In fact, the COT report shows that as of last Tuesday, "managed money" was short about 25,000 CBOT contracts.

To me it seems that the CBOT wheat is oversold. The USDA report due out on Friday may clarify crop size issues. Today's price action may show an "outside-day reversal"-- CBOT wheat made new lows, but finished higher. There may be a very good bullish case for Dec MGEX wheat, but I am not convinced it is better than the case for CBOT wheat at these prices. I'm flat.

Mighty Dec MGEX Trades to Higher Premiums

Dec MGEX was bought up to higher levels both on a calendar basis vs March and an intermarket basis vs CBOT. Dunno why really. Informa released a crop estimate for Hard Red Spring wheat that was lower than the USDA published in August...but was perhaps higher than the expectations for this revision.

Further, the other calendar spreads, March12/May12 and May12/July12, didn't really follow the Dec11/March12 lead, so it isn't clear that the market expects a small crop that leads to tight inventories. Apparently just a lot of demand for Hard Red Spring wheat delivered right now or very soon.

MGEX Wheat Overlooked in Sell-off

If this trader was at all typical of most grain traders, then the market was entirely concerned with developments in global equity and bond markets. The liquidation of "risk" assets including commodities was front and center all day. But not many macro investors own MGEX wheat, so the decline there was relatively moderate. And the MGEX premium to CBOT increased.

When the pendulum swings and the macro investors are back in buying corn and CBOT wheat (where they are short), it may be a bit tougher to own this spread. Hopefully, a few extra longs as a tail hedge will mitigate the effect of speculators rushing to buy Chicago wheat...but that day looks far off at the moment.

Slow Growth in MGEX Deliverable Stocks

The weekly report on deliverable inventories continues to show slow growth in the wake of a late harvest. http://www.mgex.com/grain_historical.html

This should support the current premiums for MGEX wheat over CBOT, but leaves me puzzled about MGEX calendar spreads. If traders are paying 8-9 cents premium for Dec over March, where is the Spring going to come from that will drive May12 down to even with July12? In other words, if the market is so tight in Dec11, why won't it be tight in May12?

Today's Intermarket Wheat Spreading

I like the current futures curves in both MGEX and CBOT wheat. The MGEX is relatively flat over the next year. The CBOT is in, by historical standards, steep contango and with the current VSR rules may go to a steeper contango. So as we go out on the curves, MGEX trades at a smaller and smaller premium. And the beauty of it is that this is not due to the market anticipating a smaller cash premium in the future, but because the CBOT has established rules to make it very expensive to hold their wheat futures.

As time goes by, the premium for any MGEX futures contract to CBOT should move toward the levels seen at the front end of the curve--if all others things remain the same which, of course, they won't. The chief worry of mine is that CBOT will rally very rapidly due to its cheapness relative to corn.

I think this problem can be mitigated by purchasing around 10% more MGEX futures on the long side. Sure, there's plenty that can go wrong with that, but I like it better than waiting on the sidelines while MGEX steadily appreciates vs CBOT.

Dec MGEX--The Worst Wheat in World (Today)

Frustrating day for lovers of Dec MGEX wheat futures as the market strengthened vs CBOT from the opening towards afternoon only to plunge late in the session. I added to my long Dec11 MGEX vs CBOT position while the market was strong and that looked pretty dumb by the end of the day.

Certainly there is the possibility that MGEX will continue to weaken versus CBOT as both market trend downwards--with the CBOT descent slowed by its cheapness relative to corn. That would be rather painful for me.

MGEX Calendar Spreads Show Strength

With Sep11 off the board, Dec MGEX was the strongest of the grain markets. Not surprisingly, with corn dropping 3% there was not so much support for CBOT wheat and the Dec MGEX/CBOT spread added almost 15 cents. The action was more muted farther out on the curve with July MGEX up only about 5 cents against CBOT.

I only managed to put a toe back into long Dec11 MGEX vs CBOT positions.

Murphy's Law Strike Again...

Negative news for wheat prices --I would presume aggressive export competition from Russia/Ukraine--had an impact on KC and even mighty MGEX, but the cheap CBOT wheat was bulletproof. As corn added a couple of cents, so did CBOT wheat.

As a result, I ejected the nearby long MGEX vs CBOT positions for a loss. Farther out on the curve, the intermarket spreads were steadier and toward the end of the day I used the sell-off in MGEX wheat to move my Dec12 MGEX vs CBOT position in to July12.

Overall, while the wheat/corn ratio levels will encourage feeding wheat, there is still going to be plenty of Soft Red Winter Wheat inventory--enough to drive the carry back towards record contango levels. So while it's tough to pick levels to buy nearby MGEX wheat because the relationship will be volatile, the forward curves will continue strongly to support longer term long MGEX vs CBOT positions.

Waiting for the Hard Spring Wheat Harvest

The expected rivers of wheat flowing toward Minneapolis are thus far just babbling brooks trickling in...

MGEX deliverable stocks in Duluth are only up about 1.5MM bushels from the pre-harvest lows, while in recent years we have seen inventories jump by more like 5-9MM bushels by this date. Maybe it's just a little late.

A late harvest explains why Sep is trading 40 cents over Dec, but it doesn't account for why every spread for the next year is in backwardation. That indicates a tight market even after the harvest.

I'm maintaining smallish long MGEX wheat futures positions vs CBOT. The chief worry on these is that CBOT wheat is already so cheap vs corn: Dec CBOT wheat is 20 cents under corn.

New Positions at Steeper Levels

After a 2-3 week break from hectic wheat futures action, I have resumed trading...putting on both long Dec11 and Dec12 MGEX vs CBOT positions. With the Dec11 MGEX at a lofty $1.70+ premium, this doesn't qualify as bargain hunting.

Still, the futures curves still favor this position. Tight nearby supply has Sep11 MGEX trading at around $2.40 premium to CBOT. And while the MGEX Dec11 contract is trading at even with March, the CBOT Dec11 is at over 35 cents discount to March with another 30 cents of downside to full carry...