Due to lack of space under a previous post, I will continue the conversation on MGEX backwardation here.
The basis between cash Hard Red Spring Wheat and Dec11 MGEX futures does not seem unusual: the cash is about 25 cents under the futures. The MGEX charts are here:
http://www.mgex.com/charts.html?page=mspread&cc1=MW&spr1=MWZ11&mon1=Z&year1=11&cc2=IP&spr2=IPY11&mon2=Y&year2=11&size=b&den=high&jav=adv&data=A&expm=0&date=111811&code=xmri&org=com&crea=Y&sprd=Y&button=Create+Spread
With MGEX deliverable inventories at the lowest levels in many years, it isn't surprising to see MGEX futures at big premiums to other wheat futures. However, since there are 12MM+ bushels in storage, why is the market in backwardation? I think the only explanation is that buyers are willing to pay a "control premium." As Ken has pointed out in comments, there wouldn't seem to be any source of more inventory over the next 6 months. So buyers are willing to pay up for the current inventory stock.
So why isn't the backwardation steeper for March12/May12 and the more deferred spreads until the new crop comes to market in Sep12? I believe that there is some chance that the very high prices for Hard Red Spring Wheat in Duluth will simply kill demand. Within the last 5 years we have seen 2 instances where the deliverable inventories grew over the period from November (after the harvest) to the following August--2006-7 and 2009-10. It isn't certain that the market will tighten as inventories are consumed; supplies will continue to trickle in, while exports and domestic consumption will be constrained by high prices.
That's my take on it. Sadly, Ken, the only view I have from my MGEX seat is of anonymous electronic screens--I don't see any customer flows whatsoever. I am purely a prop trader using public data.
Finally, I'm going home flat tonight. While I still favor KC over CBOT, the forward curves are not so different at this juncture. If one accepts the spread in cash markets to be a fair price, then going out to July only gives the KC longs a 15-20 cent advantage (47-48 cents premium for July12 KC vs CBOT as opposed to 65 cents in current cash markets). With the prospect of a surge in CBOT futures prices powered by short-covering, I would rather wait and see.
Subscribe to:
Post Comments (Atom)
Posts
Ok, thanks for your explanations. I also feel that deffered spread should in stronger backwardation because control premium should be more important when stocks of wheat are low (at the end of the harvest).
ReplyDeleteI got another question on Kansas/Minneapolis, why commercials are not switching a little bit more on the cheaper Kansas (even if quality is lower) ? The spread is so big that is should be very bearish for Minneapolis market ?
Is it easy to be a prop trader ? I saw that you get a lot of trading experience before being your own boss.
Have a nice end of week end
The stronger backwardation will only develop if stocks of wheat decline at MGEX--as I pointed out, we have seen several years recently where that did not happen.
ReplyDeleteAccording to the Kansas City Board of Trade daily reports, there is a big premium being paid for high protein Kansas wheat.
http://www.kcbt.com/histdata/KCReview/gmr_20111118.pdf
Hard Red Winter Wheat with 14% protein is getting a $2.00-$2.15 premium to ordinary deliverable wheat there. That brings the price for high-protein wheat in Kansas City up close to the $2.40-42.50 premium for Dec MGEX over KC.
Generally speaking, I would not say it is easy to be a prop trader. The success rate is very low for new traders...though perhaps not as bad as starting other businesses with low barriers to entry like restaurants. My experience is that with strong risk controls and a well-disciplined plan for trading, it is possible to extract some money from the wheat futures market. While I would not expect to win on trades versus farmers or other commercial participants over the long run, there is no reason that a prop trader cannot win on trades versus the passive index investors and the trend-following money managers in that time frame.
May I have your email ?
ReplyDeleteI'd like to send your some private content.
Thanks
I'm curious - what are the advantages to owning a seat on an electronic exchange besides not paying broker fees on trades vs. trading through a broker, particularly in light of your comment above about your limited visibility? Thanks.
ReplyDeleteis the annual report for the MGEX publicly available? i'd love to see the financial statements for the exchange
ReplyDelete