After a weak opening, MGE wheat futures gained quickly against the CBOT, finishing a nickel stronger on the spread. Neither market moved much in outright terms; MGE a couple of pennies up, CBOT a couple of pennies down. Certainly the CBOT did not appear under a whole lot of pressure--the calendar spreads remained at last week's levels. The MGE did look stronger with the calendar spreads there flattening a bit.
The CFTC COT report did show considerable short covering and assuming further covering after the Tuesday cutoff, the trend-followers look to be about flat at this point. Does that mean that the relative wheat futures values are now at "fair" levels? Not exactly. Perhaps it does mean that we are at more normal levels of distortion due to commodity index positions. But those levels, July11 MGE 5 cents over CBOT, July11 KC at a discount to CBOT, are still distorted-and therefore attractive.
Monday, July 12, 2010
Friday, July 9, 2010
USDA Report Sends Wheat Down a Bit
The USDA reported on the World Ag Supply/Demand today. Highlights included a 2.5% lower projection for global wheat inventories due large to lower output from Former Soviet Union producers that was as expected and a very high yield estimate for the USA's current domestic production which was also expected. The wheat futures generally opened and closed down a dime--off 2% after a 20% rally in 8 sessions.
Our spreads didn't move much. CBOT calendar spreads were at a slightly steeper contango after the report; intermarket spreads fluctuated around yesterday's levels.
We weren't really expecting a miracle today in terms of great news to drive our positions, and we didn't get one. The past couple of weeks have been a useful case study in how markets make opinions: news blurbs now are pointing to hot weather spots and wet patches and rain-delayed harvestings, gone are the discussions of the surplus inventories in India so large that all proper storage is full and wheat is being stored out in the open air in piles.
Clearly, wheat inventories remain very large and the current production is relatively high. It's certainly possible that trend-followers will embrace wheat after these strong moves higher--driving the nearby CBOT to higher levels vs other alternatives. We will have to wait and see. But given the volume of wheat in storage, physical buyers can afford to be choosy; hard to see why they would choose low-protein, soft wheat at levels close to hard wheat. Also hard to see how speculators benefit from holding a commodity where storage is running at over 20% annualized and may get even more dear.
Our spreads didn't move much. CBOT calendar spreads were at a slightly steeper contango after the report; intermarket spreads fluctuated around yesterday's levels.
We weren't really expecting a miracle today in terms of great news to drive our positions, and we didn't get one. The past couple of weeks have been a useful case study in how markets make opinions: news blurbs now are pointing to hot weather spots and wet patches and rain-delayed harvestings, gone are the discussions of the surplus inventories in India so large that all proper storage is full and wheat is being stored out in the open air in piles.
Clearly, wheat inventories remain very large and the current production is relatively high. It's certainly possible that trend-followers will embrace wheat after these strong moves higher--driving the nearby CBOT to higher levels vs other alternatives. We will have to wait and see. But given the volume of wheat in storage, physical buyers can afford to be choosy; hard to see why they would choose low-protein, soft wheat at levels close to hard wheat. Also hard to see how speculators benefit from holding a commodity where storage is running at over 20% annualized and may get even more dear.
Thursday, July 8, 2010
Should've Gotten a Job with a Pension...
Sep CBOT wheat was popular again today. The crop is well on its way to a good harvest on top of a big inventory. Spring wheat (MGE) there's some uncertainty left on weather; Corn demand is very strong; Oats have weather issues and a smaller crop planted....but Winter wheat, all you're looking at (if you're outright long) is high storage fees for a long time.
Well, I guess this is the beauty of the wheat market today--opportunities galore. While managed-money shorts have to cover on rallies, the commodity index longs will ignore wheat market fundamentals, charges and other technicalities and keep holding Sep CBOT until the beginning of August.
Sep CBOT outperformed MGE by about a nickel, crunching the spread into about 25 cents by the close--July11 MGE traded at less than a nickel over CBOT. While it is certainly possible that July11 MGE could trade at 15-25 cents under CBOT, it's very, very unlikely to finish there. Unless crackers start trading at a premium to bagels...
Well, I guess this is the beauty of the wheat market today--opportunities galore. While managed-money shorts have to cover on rallies, the commodity index longs will ignore wheat market fundamentals, charges and other technicalities and keep holding Sep CBOT until the beginning of August.
Sep CBOT outperformed MGE by about a nickel, crunching the spread into about 25 cents by the close--July11 MGE traded at less than a nickel over CBOT. While it is certainly possible that July11 MGE could trade at 15-25 cents under CBOT, it's very, very unlikely to finish there. Unless crackers start trading at a premium to bagels...
Wednesday, July 7, 2010
Why I'm Long Sep MGE vs CBOT
Wheat rallied another 4% today helped by continued gains in corn and a generally positive backdrop for commodities. Over the past few weeks, the wheat:corn price ratio has gone from 1.25 up toward 1.40. Since the only really bullish news has been in the corn market, it shows the impact of the non-commercial traders in grains--corn speculators have been long, while wheat specs have been short until now.
While a rally like this would typically hurt our short, front-end CBOT positions vs MGE wheat and back-month CBOT longs, that was not the case today. The CBOT contango steepened and hard wheat futures outperformed the CBOT. Today we saw the July11 MGE/ CBOT spread at about 5 cents premium for MGE. While it is certainly possible for MGE to trade at a discount to CBOT, at present there does not seem to be any fundamental economic case for that scenario. Eventually, the pressure of the more expensive carry on the CBOT, along with the lower protein content, will have its effect.
Even as the wheat market was up over 20 cents/bushel today, the Sep/Dec CBOT spread went to 29 cents while MGE remains inside of 17 cents. It is unclear to me why the CBOT Dec/July11 spread is still around 50 cents; the same monthly rate as Sep/Dec would put Dec/July11 at 67 to 68 cents. And while there should be less physical wheat to store from Dec to July11, there will be wheat to store and the VSR rate at the CBOT will likely be higher than the rate from Sep to Dec.
If Sep/July11 CBOT spreads move toward $1 bushel and July11 MGE vs CBOT trades at a more reasonable 25 cent premium for MGE, that works out to something more like 75 cents premium for Sep MGE over CBOT (30-31 cents today)--so that's where I see these spreads going.
While a rally like this would typically hurt our short, front-end CBOT positions vs MGE wheat and back-month CBOT longs, that was not the case today. The CBOT contango steepened and hard wheat futures outperformed the CBOT. Today we saw the July11 MGE/ CBOT spread at about 5 cents premium for MGE. While it is certainly possible for MGE to trade at a discount to CBOT, at present there does not seem to be any fundamental economic case for that scenario. Eventually, the pressure of the more expensive carry on the CBOT, along with the lower protein content, will have its effect.
Even as the wheat market was up over 20 cents/bushel today, the Sep/Dec CBOT spread went to 29 cents while MGE remains inside of 17 cents. It is unclear to me why the CBOT Dec/July11 spread is still around 50 cents; the same monthly rate as Sep/Dec would put Dec/July11 at 67 to 68 cents. And while there should be less physical wheat to store from Dec to July11, there will be wheat to store and the VSR rate at the CBOT will likely be higher than the rate from Sep to Dec.
If Sep/July11 CBOT spreads move toward $1 bushel and July11 MGE vs CBOT trades at a more reasonable 25 cent premium for MGE, that works out to something more like 75 cents premium for Sep MGE over CBOT (30-31 cents today)--so that's where I see these spreads going.
Tuesday, July 6, 2010
Trials and Tribulations
By the close, most aspects of the wheat futures were close to unchanged. The front-end contangos steepened: Sep/Dec about 2 cents more premium Dec. The back-end was flatter: Dec/July11 3 cents less premium July11. Intermarket spreads ended near unchanged after an initial move toward continued CBOT strength--the CBOT started the day up 20 cents/bushel, but fell back to a close up less than a nickel.
Overall, the calendar and intermarket spreads have moved back to levels I thought we would never see again on these contracts. At the beginning of March, one of the first calendar trades we did was short Dec10/ long Dec11 at around 80 cents premium Dec11. That premium moved up steadily to well over $1, but has dropped all the way back to 80 cents again. While the intermarket spreads aren't all the way back, Sep MGE/CBOT was available at 25 cents premium MGE today--much closer to the roughly 15 cent premium for the front month we saw in early March than the 75-80 cent premium prevailing in early June.
Not much has changed in the fundamentals of these trades. Demand has been OK. European prices have moved up, taking some pressure off export competition. But inventories of all US varieties of wheat continue to be quite large by historical standards, with no prospect of any shortage through the next US harvest. The VSR regime at the CBOT appears to have solved their cash/convergence problem. It looks like the steep CBOT contango encouraged traders and producers to store CBOT Soft Winter Wheat instead of selling it outright. It's possible his has made KC Hard Winter Wheat relatively less attractive to store and correspondingly more attractive to sell for cash--driving the cash to a large $1.30/bushel discount to KC futures. While the cash/convergence problem may have moved, there is still plenty of cheap cash market wheat available.
Essentially, most of our wheat market variables have been reset to similar values to 4 months ago (unfortunately, including P&L)--I think this represents an opportunity just as good this time around.
**Maybe my posting problems relate to Google Blogger issues--I notice that posts that definitely have 2 comments below, still read "1 comment" below the post. Thanks for the comments BMH.
Overall, the calendar and intermarket spreads have moved back to levels I thought we would never see again on these contracts. At the beginning of March, one of the first calendar trades we did was short Dec10/ long Dec11 at around 80 cents premium Dec11. That premium moved up steadily to well over $1, but has dropped all the way back to 80 cents again. While the intermarket spreads aren't all the way back, Sep MGE/CBOT was available at 25 cents premium MGE today--much closer to the roughly 15 cent premium for the front month we saw in early March than the 75-80 cent premium prevailing in early June.
Not much has changed in the fundamentals of these trades. Demand has been OK. European prices have moved up, taking some pressure off export competition. But inventories of all US varieties of wheat continue to be quite large by historical standards, with no prospect of any shortage through the next US harvest. The VSR regime at the CBOT appears to have solved their cash/convergence problem. It looks like the steep CBOT contango encouraged traders and producers to store CBOT Soft Winter Wheat instead of selling it outright. It's possible his has made KC Hard Winter Wheat relatively less attractive to store and correspondingly more attractive to sell for cash--driving the cash to a large $1.30/bushel discount to KC futures. While the cash/convergence problem may have moved, there is still plenty of cheap cash market wheat available.
Essentially, most of our wheat market variables have been reset to similar values to 4 months ago (unfortunately, including P&L)--I think this represents an opportunity just as good this time around.
**Maybe my posting problems relate to Google Blogger issues--I notice that posts that definitely have 2 comments below, still read "1 comment" below the post. Thanks for the comments BMH.
Another Post Lost in Cyberspace...
I have had a few very bad trading results over the past two weeks, but I haven't stopped the daily posts. Something about posting using the hotel wi-fi just didn't work consistently.
As of last Friday, I thought the worst of the damage had been done--that most of the short-covering on the CBOT that squashed the MGE/CBOT premium and the CBOT contango had taken place. This morning that is not so clear. The CFTC COT report didn't show a lot of short-covering through last Tuesday and the spike up in wheat prices indicate there were still more stop-losses to be hit.
Of course, I am mainly on the lookout for signs that our current positions are wrong, as opposed to poorly timed. The July/Sep wheat futures spreads are still at full storage costs (though not much beyond that). The Sep/Dec spreads do not reflect any tightening of supplies on any exchange. The only real mover this morning is Dec/July CBOT, where I believe outright sellers of the 2011 crop are combining with front-end short-covering to force in the spread.
While the market can stay irrational longer than we can stay solvent, as Dec/July trades into levels inside of actual storage costs (around 52 cents), we can expect producers to unwind hedges and sell the cash Soft Winter Wheat or roll the hedge at least back from July11 to Dec10.
As of last Friday, I thought the worst of the damage had been done--that most of the short-covering on the CBOT that squashed the MGE/CBOT premium and the CBOT contango had taken place. This morning that is not so clear. The CFTC COT report didn't show a lot of short-covering through last Tuesday and the spike up in wheat prices indicate there were still more stop-losses to be hit.
Of course, I am mainly on the lookout for signs that our current positions are wrong, as opposed to poorly timed. The July/Sep wheat futures spreads are still at full storage costs (though not much beyond that). The Sep/Dec spreads do not reflect any tightening of supplies on any exchange. The only real mover this morning is Dec/July CBOT, where I believe outright sellers of the 2011 crop are combining with front-end short-covering to force in the spread.
While the market can stay irrational longer than we can stay solvent, as Dec/July trades into levels inside of actual storage costs (around 52 cents), we can expect producers to unwind hedges and sell the cash Soft Winter Wheat or roll the hedge at least back from July11 to Dec10.
Thursday, July 1, 2010
What a Disast.....uhhh, Opportunity (part 2)
I did write a post yesterday....don't know why it didn't go up.
The gist of it was that we've seen a lot of trend-follower short-covering. There isn't any particularly bullish wheat news nor any CBOT soft wheat shortage.
Our timing so far has been disastrous on the intermarket spreads, but I think we will see a recovery in hard wheat futures premiums.
The gist of it was that we've seen a lot of trend-follower short-covering. There isn't any particularly bullish wheat news nor any CBOT soft wheat shortage.
Our timing so far has been disastrous on the intermarket spreads, but I think we will see a recovery in hard wheat futures premiums.
Subscribe to:
Posts (Atom)
Posts
