Slow Growth in MGEX Deliverable Stocks

The weekly report on deliverable inventories continues to show slow growth in the wake of a late harvest. http://www.mgex.com/grain_historical.html

This should support the current premiums for MGEX wheat over CBOT, but leaves me puzzled about MGEX calendar spreads. If traders are paying 8-9 cents premium for Dec over March, where is the Spring going to come from that will drive May12 down to even with July12? In other words, if the market is so tight in Dec11, why won't it be tight in May12?

Today's Intermarket Wheat Spreading

I like the current futures curves in both MGEX and CBOT wheat. The MGEX is relatively flat over the next year. The CBOT is in, by historical standards, steep contango and with the current VSR rules may go to a steeper contango. So as we go out on the curves, MGEX trades at a smaller and smaller premium. And the beauty of it is that this is not due to the market anticipating a smaller cash premium in the future, but because the CBOT has established rules to make it very expensive to hold their wheat futures.

As time goes by, the premium for any MGEX futures contract to CBOT should move toward the levels seen at the front end of the curve--if all others things remain the same which, of course, they won't. The chief worry of mine is that CBOT will rally very rapidly due to its cheapness relative to corn.

I think this problem can be mitigated by purchasing around 10% more MGEX futures on the long side. Sure, there's plenty that can go wrong with that, but I like it better than waiting on the sidelines while MGEX steadily appreciates vs CBOT.

Dec MGEX--The Worst Wheat in World (Today)

Frustrating day for lovers of Dec MGEX wheat futures as the market strengthened vs CBOT from the opening towards afternoon only to plunge late in the session. I added to my long Dec11 MGEX vs CBOT position while the market was strong and that looked pretty dumb by the end of the day.

Certainly there is the possibility that MGEX will continue to weaken versus CBOT as both market trend downwards--with the CBOT descent slowed by its cheapness relative to corn. That would be rather painful for me.

MGEX Calendar Spreads Show Strength

With Sep11 off the board, Dec MGEX was the strongest of the grain markets. Not surprisingly, with corn dropping 3% there was not so much support for CBOT wheat and the Dec MGEX/CBOT spread added almost 15 cents. The action was more muted farther out on the curve with July MGEX up only about 5 cents against CBOT.

I only managed to put a toe back into long Dec11 MGEX vs CBOT positions.

Murphy's Law Strike Again...

Negative news for wheat prices --I would presume aggressive export competition from Russia/Ukraine--had an impact on KC and even mighty MGEX, but the cheap CBOT wheat was bulletproof. As corn added a couple of cents, so did CBOT wheat.

As a result, I ejected the nearby long MGEX vs CBOT positions for a loss. Farther out on the curve, the intermarket spreads were steadier and toward the end of the day I used the sell-off in MGEX wheat to move my Dec12 MGEX vs CBOT position in to July12.

Overall, while the wheat/corn ratio levels will encourage feeding wheat, there is still going to be plenty of Soft Red Winter Wheat inventory--enough to drive the carry back towards record contango levels. So while it's tough to pick levels to buy nearby MGEX wheat because the relationship will be volatile, the forward curves will continue strongly to support longer term long MGEX vs CBOT positions.

Waiting for the Hard Spring Wheat Harvest

The expected rivers of wheat flowing toward Minneapolis are thus far just babbling brooks trickling in...

MGEX deliverable stocks in Duluth are only up about 1.5MM bushels from the pre-harvest lows, while in recent years we have seen inventories jump by more like 5-9MM bushels by this date. Maybe it's just a little late.

A late harvest explains why Sep is trading 40 cents over Dec, but it doesn't account for why every spread for the next year is in backwardation. That indicates a tight market even after the harvest.

I'm maintaining smallish long MGEX wheat futures positions vs CBOT. The chief worry on these is that CBOT wheat is already so cheap vs corn: Dec CBOT wheat is 20 cents under corn.

New Positions at Steeper Levels

After a 2-3 week break from hectic wheat futures action, I have resumed trading...putting on both long Dec11 and Dec12 MGEX vs CBOT positions. With the Dec11 MGEX at a lofty $1.70+ premium, this doesn't qualify as bargain hunting.

Still, the futures curves still favor this position. Tight nearby supply has Sep11 MGEX trading at around $2.40 premium to CBOT. And while the MGEX Dec11 contract is trading at even with March, the CBOT Dec11 is at over 35 cents discount to March with another 30 cents of downside to full carry...