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.

Just Loitering

Waiting to see the impact of expanded CBOT position limits with regard to Deutsche Bank's ETF positions on MGEX.

May be waiting for a few days.

Raising the White Flag

Surrendered more of my long MGEX/short CBOT position today. One factor is the general commodity index rebalancing spurring some CBOT buying, and another is the rebalancing away from MGEX as reported by DTN, and finally, there's a big USDA report Thursday the 12th.

Better to have more flexibility to trade over the next week than to try to predict the outcomes of these uncertain events.

More Crumbling....

With buyers on the CBOT due to non-commercial short-covering ahead of the USDA report Thursday and also an annual commodity index rebalancing, the MGEX did not keep pace in today's rally. But maybe it's worse than that; the cash market premiums have fallen just as fast and the calendar spreads' backwardation has nearly disappeared.

So...not much demand for cash spring wheat and futures markets focused on buying CBOT has been a recipe for disaster for long MGEX/short CBOT positions like mine. Oh dear.
I've cut half of it and kept only July12 MGEX--which is at a reasonable $1.20 premium at this stage. At least i think it's reasonable

MGEX Premium Crumbles

After yesterday's hard sell-off in March12 MGEX futures, it wasn't surprising to see that the weekly inventory numbers from Duluth showed that wheat is building there and not moving out. http://www.mgex.com/grain_historical.html

The price action in MGEX wheat yesterday was also crushing for the hopes of MGEX longs--a big move up early only to fail spectacularly into the close. Misery.

So March MGEX has lost $1 versus CBOT in about 6 weeks. Dump it? Well, I think no. The short-covering on CBOT has run perhaps half its course, while net longs at MGEX at very low. Inventories are still quite small for Spring Wheat while overall wheat inventories at very high. I like MGEX to outperform at paying $1.20 to $1.30 premium for July doesn't seem excessive when cash market premiums ares till $2.20 to $2.30.

Sticking with the MGEX.

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...

More Pain...

Mar12 KC wheat futures fell to 48 cents premium to CBOT today; not a big surprise since the tone of the market was set by outside markets rallying on central banks easing policy--so more positive impact on the speculator-sensitive CBOT contract.

At the front end of the market, the Dec/Mar KC spread tightened notably and there were reports of cash wheat trading at a premium to Dec11 KC contracts.

I did not add at better levels.

In some additional painful news, MF Global appears to have hit the bid for 1 MGEX seat at $106,000 and may have 3 more to sell...with the best bid now only $80,000. Distressed seller of MGEX seat with the rest of the equity market up 6% in 3 days. Looks like an opportunity.

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.

Writing Before the Close...

Dec11 MGEX wheat has dropped 80 cents/bushel vs CBOT in just the last 4 sessions. It is now about 65 cents/bushel below where it was when I noted that the MGEX premiums were too risky for me. I should note that I was not not long the Dec11 MGEX anyway, but rather the March12 and July12 MGEX which are only about 15 cents lower and unchanged respectively versus CBOT. I am still patting myself on the back for avoiding some extra volatility...