My conservative move into long KC wheat vs CBOT (from my former long MGEX vs CBOT) delivered nothing but misery today. July 12 KC drifted down to around 48-49 cents premium to CBOT--after opening higher at 55-56 cents premium. I continued to add long KC vs CBOT.
CFTC COT report showed very high levels of CBOT shorts (45K) and the Dec CBOT firmed sharply on the calendar spreads. So that's sums up the tough part of shorting the CBOT. On the other hand, Cash markets premiums for protein remain very firm and cash Hard Red is around 80 cents over Soft Red. So the fundamentals seem friendly enough.
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Hi tinbox,
ReplyDeleteI am reading your blog for some weeks and I like your theory and agree with them. I have quite the same theory between CBOT wheat and Euronext wheat on anormal contago on CBOT and anormal backwardation on Euronext wheat.
Could you explain me what you understand on the VSR system and how it impacts the contago on the CBOT ? How do you get the long position of Index funds on CBOT and how the move between expiry ?
I also still don't get why Minneapolis is in backwardation inside the 2011 harvest. It doesnt make any sense for me. We have the same puzzle in Europe with rapeseed. I have an idea related to Against Actual. Do you know if commercials are using Against Actual contract for Minneapolis wheat ?
Thanks in advance for your answers,
YopYop
Here is the CME paper on VSR:
ReplyDeletehttp://www.cmegroup.com/trading/agricultural/files/vsr-whitepaper.pdf
If you click on the VSR calculator link here--
http://www.cmegroup.com/trading/agricultural/grain-and-oilseed/variable-storage-rate.html
You will get an excel spreadsheet that shows that CME's current calculation for VSR.
If the Dec11/Mar12 spread stays at current levels, the VSR rate will drop to .00565 cents/day--about 17 cents/month. Since all the calendar spreads are currently much narrower than that, there should not be much market impact. Note that if March12/May12 calendar spread averages over 80% of the new full carry (around 34 cents plus 2.5 cents finance, so 36.5 cents times 0.8 equals about 29 cents)during the 6 weeks (approximately) approaching delivery, then the VSR would rise back to about 20 cents/month plus finance, so 42.5 cents for March12/May12.
As far as the long position of index funds, you can find it at the CFTC website:
http://cftc.gov/dea/options/ag_lof.htm
Possibly, the MGEX backwardation may be explained by low deliverable stocks. The MGEX publishes inventory information here:
http://www.mgex.com/grain_historical.html
Click on the appropriate year and it opens a spreadsheet, so you can compare the current year to previous years.
On your last point about commercial traders using AAs, I don't have much to say. I don't see any commercial flows of business, so anything I say would just be idle speculation.
Thanks for the comment and I hope the links are some help.
Thanks for all the links and answers.
ReplyDeleteMGEX backwardation explained by low deliverable stocks ?
But it is likely to get more stocks in 6 months ?
Why elevators don't use trucks to bring more stuff in delivery instead of selling on end of harvest expiry ?
It seems strange that the lack of delivery stock is at the beginning of the harvest in the heart of MGEX wheat.
I really don't understand this kind of market.
I saw that you have a seat on MGEX. Are you a kind of market maker or/and just prop trader ? Can you see commercials/non commercials order flow from your "seat" ?
There is no more "seat" in European market and it seems quite strange for me.
Have a nice day,
YopYop