CBOT Short-Covering Dominates

MGEX and KC wheat futures failed to keep up with the rally on the CBOT. The Mar12 KC premium has dropped from around 70 cents to just over 50 cents; March MGEX has fallen 50 cents versus CBOT--from near $2.70 to $2.15.

The CFTC reported that short interest continued to grow on the CBOT wheat futures. Further, via Twitter we had Al Conway (http://www.cashwheatreport.com) speculating about more passive index buying for the new year:

CFTC CIT (sic) report shows wheat funds record short 86 K contracts & Index fund reallocation suggest they buy 42 K contracts wheat in New Year.

Also we saw inventories build slightly at Duluth for MGEX. The premium for Dec11 to Mar12 which was as high as 85 cents/bushel, crumbled to 5 cents (flat at one stage today) going into the First Notice Day tomorrow.

So, overall, there isn't much bullish news out there. Wheat inventories are substantial; the weather is good; the US dollar is strong. However, the non-commercial players are short and the longer term investors are under-exposed. It's a situation where a rally could fuel further rallying.

But I'm not willing to bet on (or wait out) a rally. We have only seen March12 KC at levels this cheap versus CBOT a couple of times over the last 4 months. There is much more room for the CBOT contango to steepen than there is for KC. Eventually the large inventories (CBOT's Soft Red Winter Wheat has the highest stocks/use ratio) will eventually take their toll--especially if even more index investors get on the long side. So I am keeping and adding to my long Mar12 KC vs CBOT position.