More Pressure on MGEX

MGEX wheat didn't see any love today. While KC added 13 cents and CBOT added 7-8 cents, MGEX dropped 6 cents. The front of the MGEX curve was a bit weak too--both March/ May and May/July dropped a penny or two.

So now March MGEX is under $2.00 premium to CBOT and July is under $1.30 premium. I'm still betting it's a bargain here. The MGEX calendar curve is still strongly inverted and there is not some crazy stampede into CBOT (as in the 2010 Russian drought. MGEX wheat is the only wheat market in short supply. Is $1.95 premium too much? Maybe, but this is down from $2.70 premium for March just 6 weeks ago, so there is certainly less built into it now.

Happy New Year!

Some Pressure on MGEX

The cash premium for Hard Red Spring wheat has declined to around $2.40 over Soft Red Winter, and July MGEX has dropped to less than $1.40 over CBOT. However the calendar spreads are still quite firm for MGEX and Duluth inventories continue to decline.

At this point I still believe that there is some short covering on CBOT that is forcing that market upwards more quickly than MGEX. But it has been a somewhat painful theory for the past week.

My biggest current worry would have to be rebalancing of commodity indexes next week which could spur significant CBOT buying. Oh dear.

And Now into Both MGEX and KC

With July MGEX at just over $1.50 over CBOT and July KC at only 35-36 cents over CBOT, I am long both the hard wheat futures. Cash markets for spring wheat are at least $2.50 over soft winter wheat and hard winter has at 50 cents premium to soft winter, so the forward levels are reflecting the steeper contango on the CBOT.

I suppose the theory is that higher nearby prices will kill demand for the hard wheats and so cash prices for them will ease relative to the CBOT's soft winter wheat as July delivery approaches. Essentially, the market is rationing the hard wheat efficiently and premiums will decline over time.

I'm not sure that's happening. Seems more likely that the relative shortage of hard spring MGEX wheat is forcing the backwardation to increase on that curve, while the CBOT curve indicates that market will stay well supplied right through harvest. It is just a lack of speculative capital that allows that MGEX contract to trade at such a small premium to CBOT out in July.

Switching Out of KC and into MGEX

With KC at the high end its range vs CBOT and MGEX nearer the low end, I made a switch. Though MGEX is at a far more elevated premium on an historical basis, the calendar spreads have remained tight and inventories are leaving Duluth once again.

Another interesting calendar spread is over in Soybeans--the crop isn't small and there should be plenty of supply, but March12/May12 beans are at the cost of storage, though only about 75% of full financial carry (calculated on 2% over Fed Funds). So that spread could go to 14 or 14.5 cents, but this seems like a cheap way to play for a rally in grains.

Still Muddling Along

The premium for March12 KC to CBOT has remained within a 5-6 cent range for a week now: 53-54 cents at the bottom, 59-60 cents at the top. MGEX intermarket spreads have been more volatile with March trading up to $2.40 premium to CBOT and below $2.20 as I type this.

The KC and CBOT calendar spreads show no indication of tightness for the foreseeable future while MGEX is in backwardation until the 2012 harvest--and less than 50% of full carry even then. Given the high global inventories of wheat, I feel more comfortable participating in the well supplied KC and CBOT markets. The MGEX premium appears to be under some pressure with the high prices killing demand. We can take another look after the inventories are released tomorrow.

I don't see any compelling trades at all. Someone please tell me I am wrong. Maybe CBOT wheat is cheap relative to Euronext?

Wheat Futures Muddle Along

The premiums for MGEX and KC wheat have generally softened as the wheat futures have traded sideways near recent lows. Ag futures are not only not in the spotlight, they aren't even on the stage. Focus is on the euro, and oil and stocks...when it comes to ags, there is more interest in MF Global than any actual crops.

One calendar spread that has caught my eye is the Sep12/Dec12 on KC which is trading at the same level as the same period on the CBOT. While that isn't a crazy level, it seems to me that there is a far greater likelihood that the contango for CBOT could steepen toward 40 cents or more, while full carry for KC will top out at 30 cents.

Feckless Trading

feckless:1. Lacking purpose or vitality; feeble or ineffective.

Back into KC at slightly higher levels. Only keeping a tiny long MGEX positions. My view on the outright wheat price has clouded my spread judgment. As it has become clearer that US wheat exports are struggling at current prices (leading to higher inventories), I have become nervous about being long MGEX or KC vs CBOT as I fear the premiums will shrink as the wheat price declines.

This is an irrational fear. First of all, I don't know which way wheat prices will move, but I should be wary of being bearish when non-commercial postitions are already quite short. Second, there isn't such a correlation between the outright price and the spread premiums that I should worry too much about it.

Further, if inventories are high and contangos go to the exchange limits for cost-of-carry, then long anything and short CBOT will have a big edge in financing.

Shifting Back to MGEX Vs CBOT

Though my gut feeling is that this move is premature, I exited the Long March12 KC vs CBOT and replaced it with long March12 MGEX vs CBOT. With wheat prices generally lower and the premium for Dec11 MGEX or cash Hard Red Spring wheat declining, the stocks have started to flow out of storage in Duluth once again.

The current $2.20 premium for March12 MGEX does not look like a bargain on a historical basis. Positions in MGEX/CBOT spreads should be smaller than KC/CBOT because it is a more volatile pair, so I will step in here gingerly.

KC Wheat Bouncing Back....Against CBOT Anyway

What seemed to be a short-covering rally in wheat futures faded badly today--almost an outside day: almost over Friday's highs in the first few minutes, then trading down below Friday's lows. So, not much pressure on CBOT's short non-commercial speculators to cover more there. Also some news out of Australia that the crop is weighted toward lower quality feed wheat--competing with US corn for export to Asia.

The net effect was that March12 KC has bounced back to 60 cents over CBOT. After finding the discipline to add a bit late last week, I was looking to lighten up as the spread pushed over 60 cents. I still like the position and the selling is just to gain flexibility for further trading...