Stepping Back In...

It seemed riskier to be out of the Dec MGEX/CBOT spread than in it. So I jumped back in buying the Dec MGEX at about 50 cents over CBOT and also at around 10 cents over KC. Don't forget to buy a little extra on the long side as a "tail hedge" against the risk of a rising grain market spurring the CBOT to narrow the spread.

I believe that at normal to lower-than-normal premiums for MGEX over CBOT that it will pay to own the MGEX contracts as the CBOT contracts will be subject to increasing VSR contangos. Already Dec/March is 22 cents more expensive to carry on the CBOT. There is every indication that full carry on the Dec/March CBOT will be around 43.5 cents--about 27% annualized to carry CBOT wheat.

Stepping Out of MGEX Wheat for a Moment

On today's pullback in the wheat market, we saw the Dec MGEX contract trading back up to the 47 cent premium level vs the CBOT. While I don't see this as overpriced at all, it does seem that there has been pressure on that premium as the grain markets have rallied over the past couple of weeks...so I went to flat.

Bids have come into the MGEX membership market, with 2 bids coming in over the past 2 days at levels above the last sale. One of those was mine. Don't know if this is related to the Board election results--though it is unusual for an incumbent not to be re-elected to most boards.

Reviewing Some Bad Calls....

Before the huge run up in wheat prices this Summer, I used to point out that wheat was cheap at below 1.3X corn, but what with the big wheat inventories it would likely get cheaper. Of course wheat sky-rocketed to about 2X corn, but funny enough, it is all the way back down to 1.25X corn. Interesting. Cattle don't usually get to eat bagels...

Another swing and a miss related to this corn rally is my call on buying ethanol vs selling corn. Even though the ethanol market remains very tight, continuing to trade in backwardation in the nearby months, ethanol was not at all able to keep pace with corn today. While I still like the trade, I have scaled back my position size (at a loss) due to the higher volatility.

And on a final note, I also reduced my position on long Dec MGEX vs CBOT--again, I like the position, but want a smaller size due to the higher volatility in grains.

Godot Arrives...and He's Buying Grains

I guess those USDA numbers were surprising. I was surprised by the reaction. It looks like there are people willing to get long at these higher levels. Hope it works out for them.

The hard wheat futures didn't quite keep pace with the CBOT, but it was pretty close. Even with the tighter grain inventories and the new highs in Corn, the grains are not going to get much ink from the press since other commodities like cotton, tin, gold and others are all making more stunning moves higher at the moment. Unlike this Summer, the grains will have to see actual demand eating into inventories to keep the rallies going. That said, the fundamentals do look positive. My thinking is that the next leg of the rally in wheat will see stronger performance from hard wheat futures relative to CBOT than we saw on the first leg this Summer.

Waiting for USDA....

Feels more like Waiting for Godot, but unlike the title character in the Beckett play, the USDA report will actually arrive tomorrow. My approach to most news releases is that they are unimportant with regard to fundamental supply/demand information, but revealing with regard to traders' positions and inclinations. My bet would be that the large speculative long positions in grains (especially Corn) will come under further pressure.

I was nervous about holding my long Dec MGEX/short CBOT today as it was very steady at lower levels-no sign of bargain hunters at 45.5/46 cents over CBOT. But the relatively strong MGEX close and the prospect of some CBOT liquidations tomorrow gave me the incentive to hold on for a bit longer. We'll see how that turns out...

Adding a Little Bit Here and There...

MGEX just about kept pace with the rally in CBOT wheat today; the Dec spread spent the majority of the day at 48-49 cents premium MGEX. I added to the "tail hedge" on concern the massive rallies in other commodities would spill into wheat. On the intermarket spreads, I added out in Dec11 where it was possible to pick up MGEX at 5 cents discount to CBOT.

The DTN cash index for Spring Wheat is around 75-80 cents premium to Soft Red Winter Wheat, so I am hoping for at least that kind of number for the Dec10 MGEX/CBOT spread eventually.

No New News Today

Recent trends continue in wheat-outright prices lower, calendar spreads move toward steeper contango, CBOT liquidations drive intermarket wheat spreads to bigger premiums for hard wheat futures.

Ethanol is recovering versus Corn. The combination of higher Crude/RBOB Gasoline and Corn under pressure from speculators liquidating long positions has helped Dec Ethanol impove by about 7 cents/gallon over the last few sessions. Not too shabby, but I think there could be a lot more upside to come.