Grains Hoisted Higher

On a day when broad commodity indexes like the old CRB (now called the Continuous Commodity Index) posted gains over 1%, CBOT wheat stayed within a few ticks of unchanged for the bulk of the day. The premium for Dec MGEX over CBOT stayed up near 58-59 cents. I continued to add to that position today. The difference between the Dec10/Dec11 carries for CBOT and MGEX continued to increase-stretching to over 60 cents at the close. The differences in the carries can manifest themselves in a variety of ways, but I am betting that there will continue to be a lot of pressure at the front end of the CBOT market.

I am also long both Dec Oats and Ethanol vs corn--looking forward to earning as those positions roll forward, particularly on the ethanol which is in backwardation.

Markets Unchanged, Nothing to Post

Marking Time in Wheat

Didn't trade. Stopped watching the market around 11:15 in NY. Glanced at the final 15 minutes.

Spent some time mulling over how the MGEX seats are the same price as the first half of 2009. I assume the Exchange real estate operations are struggling-perhaps worse than the overall Minneapolis commercial market. But as CME shares move back toward $300 and ICE shares push toward $120 (if ICE liked Winnipeg, they should love MGEX), these seats seem very cheap. I think we are only about a month away from the KCBT setting their dividend for the year--over $20K/seat last year. Over a 5% yield on the $390K last trade. Now if only the MGEX had a $5K annual dividend....

Why Don't We Just Buy Corn?

Really, I don't do very much outright speculation and I am not going long here. In fact, I did get the chance to buy Dec Oats at 62.5% of Corn. I do this with very low leverage because I plan to stay in long Oats/short Corn unless Oats drop to below 55% of Corn. So that means I have to be prepared to lose 40 cents/bushel if corn really spikes up. I am also short Corn against long Dec Ethanol.

With Dec CBOT wheat below 1.2X corn, we are getting into an area where corn is going to have to lift the entire grain market to move higher--and that's in addition to corn already carrying the weight of large commodity index longs and large trend-follower longs. That's a lot of weight to carry.

The wheat futures were uninspiring by comparison. Dec MGEX approached 60 cents premium to CBOT which was a strong showing in an up market. In a move I may regret, I let go of the long Dec11 MGEX vs CBOT at around even. That Dec11 spread has been in a 5 cent range for a month, so hopefully, I'll get a chance to get back in with MGEX at a discount.

Typical Down Day Dynamics

Speculators lightened equity and commodity positions today. Wheat traded down in line with most other markets. CBOT dropped a few cents more than MGEX or KC. Calendar spreads for the more distant months went to steeper contango. Even though the overall direction was down, the Dec11 wheat contracts were well bid with standing orders to buy every penny down on the MGEX.

A big sell-off in oats brought them back to less than 63.5% of corn. I will be looking to buy them if they drop another couple of percent on that ratio. The 300 lots of Oats that traded in the last 10 minutes appeared to be 10% of the non-commercial longs getting out. Corn, on the other hand, traded up 3 cents in the last 10 minutes without notable liquidation pressures.

KCBT Not Moving to VSR...

Apparently defying the CFTC's wishes, the Grain Service newsletter reports that the KCBT is instead considering a rise in storage charges to 6 cents/month with a seasonal 3 cents/month surcharge from July through November. The KCBT wheat contract committee expressed concern that a change to VSR could negatively affect liquidity; this fear has been addressed at the CME in this study which was published back in July. To my knowledge, the MGEX has not considered any changes to its 5 cent/month storage rates.

Dec MGEX moved to the highest level since June against the CBOT trading at a 53-55 cent premium for most of the day. A couple of cents of today's move was due to the steepening of the CBOT contango relative to MGEX. Intermarket spreads further out, say in Dec11, didn't move from recent ranges.

Consolidating Near the Highs

MGEX Dec wheat spent the day in a narrow 1% trading range that was well within the same range we have seen since the surprising USDA report last week. Looking further out at Dec11, we see the CBOT wheat contract consolidating close to its summer highs of $8/bushel; while the Dec11 MGEX is about the same $8 price now, that is above the summer highs for MGEX.
It will be interesting to look at the CFTC COT report. It would be a more bullish scenario if non-commercial trend-followers weren't holding such large net long positions.