I Better Find a New Job

After a brief rally, from about $1.80 premium to CBOT up to $1.95, the March MGEX has fallen back below $1.80 premium. Back to the level where we began the year. Actually, back to the same level where we began the fourth quarter of 2011. Well, I guess that's a win for equilibrium...

The MGEX wheat has been a bit stronger out in July, but not in any convincing kind of way; the premium for March MGEX has declined while the discount for March CBOT has been reduced--both forward curves are flatter, so the intermarket spread for July is closer to the March spread. My guess right now is that the CBOT curve has flattened because of the non-commercial short positions rolling forward--that should be just about done at this point.

I would like to be bullish on the ethanol market which is quite cheap relative to both production costs (corn) and end user alternatives (gasoline), but there seems to be quite a glut on the physical markets. It's not clear to me how even a spike up in gasoline prices would drag along the over-supplied ethanol market; a gasoline spike (due to supply shortages) would only reduce consumption of the blended gasoline/ethanol product and so would reduce ethanol consumption, possibly leading to even lower prices.

Intermarket Wheat Spreads Going Nowhere

The intermarket wheat spreads from March through Dec are within a penny or two of their levels a month ago. Markets are awaiting Thursday figures from the USDA-- but much of the short-covering on the CBOT has been done with the latest COT report showing that short positions have migrated from non-commercials over to hedgers as the outright wheat price has rallied about 5%.

As the old AIG and Goldman rolls are going through the futures markets over the first 9 days of February (for March contracts), it is clear that non-commercials have not yet gotten back to the long side in markets outside of the grain complex. With broad commodity indexes losing around 10% over the last 9 months of 2011, along with similar losses at large commodity hedge funds, it's not surprising that investors are taking a wait and see attitude. So there haven't been any easy to capture returns from distortions on the index rolls.

Still Loitering

The DB ETFs' positions look like they are being leaked out somewhat erratically with no significant effect on the market over a multi-day horizon. The MGEX premium to CBOT is fluctuating, but not trending. I'm waiting at least until after the CFTC COT data to assess the prospect of returning to my usual long MGEX/short CBOT stance.