New Twist on My One Wheat Idea

The reason I trade MGEX wheat is that I believe the passive commodity index investors distort the pricing of the wheat futures on the CBOT in significant ways. The general idea, especially after the CBOT instituted the VSR regime, was to hold the low cost of carry MGEX wheat while shorting the high cost of carry CBOT wheat.

This has been a very good strategy--but not entirely for the right reasons. The MGEX has been far stronger than just "low cost of carry," it has develop3ed a persistent and substantial backwardation. We now see premiums for nearby MGEX wheat futures to CBOT that have occurred very few times over the last 100 years. Maybe they will go higher, maybe not. The thing is, analyzing the degree of tightness in Minneapolis wheat is not really my game.

So I have liquidated my long MGEX vs CBOT positions and will replace them with long KC vs CBOT positions. For now, I nibbling away at July12 KC at just over 50 cents premium to CBOT.

PS. The CBOT calendar spreads have been liquidated, since the Goldman roll is nearly over and the spreads narrowed to realistic commercial cost of carry levels.