Continuing Cautiously Bullish Nearby MGEX

Still maintaining long July MGEX vs KC and CBOT along with a some long July/ short Sep calendar spreads. Last day of trading for May contracts is tomorrow with 1000 contracts still open and May trading at 10+ cents premium. The market does not appear very well supplied.

For all the drought impacting the Hard Red wheat market in KC, that is trading at full carry right through September...actually even beyond full carry--most likely because of quality issues around the change in contract specs for Sep contracts. Anyway, that KC market just doesn't look as tight in the short term even if the prospects are good for tighter supply/demand balance sheets in 2012.

May MGEX Open Interest Still 1000+

May MGEX wheat futures have about 20X the normal open interest for a contract with 4 trading days left to expiration. Since volume is nearly nonexistent in May at this point, I think it is fair to assume that deliveries will ensue. This makes sense with May futures 60-70 cents below cash. The deliverable MGEX wheat stocks have been dropping rapidly since the beginning of April and this trend will now continue through May. If we continue at this pace, MGEX deliverable wheat stocks will drop to less than 10 million bushels by June...with several months to go before any new Spring Wheat arrives.

There is no similar inventory or strong cash basis story on either KC or CBOT. They have their own bullish stories, but not nearby inventory stories. So I am continuing to bet on the MGEX to be the best performer of the three.

No Patience...

Though I would prefer to wait to see April economic data from China to see if Asian demand is slowing generally, I just like that July MGEX wheat too much to wait. So I took small positions long MGEX against KC and CBOT.

With May MGEX trading at more than 10 cents over July, there is a tightness in MGEX wheat that will cause it to perform well right through the new crop September deliveries.

What Would I Like to See?

To get me back in the market-- right now-- I would have to see MGEX wheat around 30 cents cheaper versus either KC or CBOT. And that's assuming all the weather and supply fundamentals are still the same. Then I would buy MGEX on an intermarket spread. Or I would buy an MGEX July/Sep calendar spread at a 10-12 cent contango. That's about it. Highly risk averse right now.

Still Waiting for Inspiration

Fascinating as the wheat market always is, I am also trying to understand whether the sharp downturns in other commodities, obviously silver and other metals, but also cotton, sugar and so on, will have an impact on wheat futures.

For now, watching and waiting.

Must Be Some Ugly Conditions in Kansas

July KC wheat futures strengthened on the calendar spreads and strengthened sharply on the intermarket wheat spreads. Whether this is due to worsening crop conditions in the Hard Winter wheat growing areas or just some market noise only time will tell...but it was enough to shake me out.

Will take a fresh look at the whole grain market in the morning.

Bullish Calendar Spread Action on MGEX

Here on the first delivery day for May MGEX wheat, we see the May contract trading at a strong 8 cent premium to July. July, in turn, is 2 cents premium to September. Backwardation! Every bull's favorite term structure.

KC and CBOT May contracts are trading at steep discounts to July -- and July at even greater discounts to September. Part of this is the regular seasonal pattern where the new crop for MGEX doesn't arrive until September, but weather concerns and quality concerns on KC and CBOT are also playing a big role. So I am pressing on with my long July MGEX/short KC and CBOT intermarket spreads.