Fundamentals on Hold for the Moment

With the rush toward "risk on" assets today, I thought it unwise to be short any nearby CBOT wheat. Only keeping a long MGEX vs CBOT position way out in Dec12 where MGEX is only 65-70 cents premium. I expect that many, if not all, CBOT shorts will be looking to cover if the markets continue to rally. So I am trying to stay out of the way.

Still looking for a tightening of Dec11 CBOT vs Mar12 as we go through the beginning of November. There are 15K contracts fewer passive index longs (compared to 3 months ago) to rollover and 40K non-commercial shorts that will be looking to roll or cover. My guess is that the current 35 cents discount for Dec is around 10 cents more than any commercial cost...

MGEX Wheat Unloved

Once again MGEX wheat dipped at the close, finishing at the day's lows vs CBOT. There has not really been a pronounced downtrend in this intermarket spread and the MGEX calendar spread continue to show short supplies, so at this point I am regarding the weakness in MGEX as a dip which should be bought. We'll see.

CBOT Wheat Trades Stronger

The most recent CFTC COT report showed managed money increasing thier short positions in CBOT wheat; this may have been related to CBOT wheat working its way stronger vs MGEX wheat and CBOT corn through the day. There were no major changes: nearby Dec CBOT wheat remains at a discount to corn and deferred CBOT contracts narrowed the MGEX premium to around 70 cents.

With the short positions in Dec CBOT wheat and the dropoff in passive commodity investment, I expect the Dec/Mar CBOT spread will not be blowing out to "super-contango" levels as we have seen in the past. In fact, I suspect there may may a little bit of a squeeze on Dec shorts coming up next week.

Heading for Cash...

The chief worry for me being long MGEX vs CBOT is that the non-commercial shorts on the CBOT will drive that market up faster then the MGEX. As the S&Ps and all other "risk on" assets moved up today, I cut all but my most deferred long MGEX vs CBOT positions. The timing was pretty bad--worst levels of the day--but not too different from yesterday's close.

As a small side bet, I keep trying to get long CBOT wheat vs corn. Still trying it. It's still not working.

MGEX Wheat Strong for 99.5% of the Day

But the last minute was a doozy. After creeping up to a $2.00+ premium to CBOT, the March12 MGEX sold off in the last minute to around $1.85 premium at the close. The weakness was general all along the MGEX futures curve with all the intermarket spreads losing at least a dime in the closing range.

But if we just look at the MGEX calendar spreads, the market didn't really collapse: Dec11 added a few cents more backwardation to March12 and the other calendar spreads weren't much changed. So there doesn't seem to be a huge change in supply/demand--seems like just a couple hundred March contracts sold somewhat inelegantly at the bell.

MGEX Wheat Creeps Higher Against CBOT

Not much to report over the past few days, but today as the MGEX deferred months--July12 and later-- moved up to the high end of their recent trading ranges vs the CBOT, I was a buyer, adding to positions. In all likelihood it is overenthusiastic, but the MGEX reports on stocks in Duluth and Minneapolis show declines from rather low peak levels. So maybe this run-up in Dec/March isn't done yet. Further, I don't see any reason to believe that the $2.50+ premium for Hard Red Spring Wheat over Soft Red Winter Wheat will decline to below $1.25 by July 12 delivery --just as the new winter wheat crop is harvested.

The only thing is that there is already a crowd on the short side of the CBOT wheat boat...

Intermarket Wheat Spreads Steady at Lower Levels

For the past two days we have seen MGEX wheat trade in a broad but well-defined range against the CBOT. In the back months, July has been a bargain around $1.05 premium and a good sale up towards $1.20--Dec12 MGEX has bounced between 60 cents and 75 cents premium. We seem to start an finish the day towards the lower ends of these ranges.

The big picture here is that MGEX wheat remains in a steep backwardation while the CBOT has a substantial carry cost. As long as this situation persists, I am comfortable maintaining an exposure that is long the forward (discounted) MGEX and short the forward (premium) CBOT.

MGEX Wheat Finishes Like the BoSox...

In what seemed a response to generally favorable news from the USDA on Spring Wheat supplies, MGEX dropped the least of the wheat futures ...at least until 1:14 Chicago time. For the deferred contracts, MGEX only fell back to yesterday's levels on the intermarket spreads versus CBOT, but that was a good 15-20 cents fall from midday levels.

At the front end, Dec11 MGEX was weak on the calendar spread vs March12 from the opening. Hard to say what that means, since Dec stayed over 40 cents premium to March. While that's a big drop from 90 cents premium seen yesterday, it's not exactly falling apart.

Going home with slightly lighter positions on the long MGEX vs CBOT in the deferred months.

Fears of CBOT Wheat Short-Covering Are Realized

It was always a danger to my long MGEX/short CBOT position that there would be a sharp rally driven by CBOT shorts. We saw at least part of that rally today. Impact was biggest at the front end of the market with Dec11 MGEX losing almost 50 cents against CBOT wheat. Going out a year, Dec12 MGEX only dropped a few cents versus CBOT.

As I look at the amount of Spring Wheat showing up at the MGEX elevators in Duluth and Minneapolis, it seems that the futures curve backwardation may continue for some time. While $2.70 premium for Dec11 MGEX to CBOT may be a risky place to buy, $1.00-$1.10 premium for July looks like a good bet. I'm in there and I will add cautiously. (Which is unlike how I exit-- which is in a hurry.)

Another Leg Higher on the MGEX Wheat

It's hard to see the commercial reasons for Dec11 MGEX to trade at $3.20 over CBOT and 85 cents premium to March12 MGEX, but that's what traded today. While WheatSpreader notes that the Dec MGEX premium is having an impact on the high-protein end of the Hard Red Winter Wheat market, there still has to be a chuck of anticipated Hard Red Spring wheat that's gone missing for commercials to need to cover at these huge premiums.

Very interesting that it is "commercials" (bona fide hedgers) that are driving this rally. Open interest is very low overall and non-commercial long positions are at quite low levels. Unfortunately, the trading action of the last two days will not be in tonight's CFTC COT report, but that report will be interesting nonetheless.

Link isn't working but WheatSpreader is on Twitter: http://twitter.com/#!/WheatSpreader

Golly, Where's This MGEX Wheat Train Headed?

Dec11 MGEX which was 40 cents premium to March12 at yesterday's open finished at 60 cents premium today. This tightness helped push the intermarket premium for Dec11 MGEX wheat from $2.50 over CBOT up to $2.80. That was enough for me. Just keeping the bargain level back months. Since the front month spread drove most of the intermarket change, the back months--July12 and Dec12--barely moved on the day.

Climbing Back on the MGEX Train

As I predicted last Friday, I am getting back in long MGEX vs CBOT wheat futures. My gut feeling is that I should wait longer, since it has only been a couple of days of correction. But $1.10 premium for July12 MGEX and 65 cents premium for Dec12 MGEX are pretty substantial falls from the $1.50+ and 90+ cents respectively seen last week.

At the front end, it was a little harder to pull the trigger and go long Dec11 MGEX at $2.50 premium, but the Dec11 contract continues to stay at over 40 cents premium to March and very few bushels are showing up at the Duluth warehouses, so we took a shot.

My main worry, as usual, is the speculative short positions in CBOT wheat. So once again I am adding a small outright long tail hedge.