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.