Just Loitering

Waiting to see the impact of expanded CBOT position limits with regard to Deutsche Bank's ETF positions on MGEX.

May be waiting for a few days.

Raising the White Flag

Surrendered more of my long MGEX/short CBOT position today. One factor is the general commodity index rebalancing spurring some CBOT buying, and another is the rebalancing away from MGEX as reported by DTN, and finally, there's a big USDA report Thursday the 12th.

Better to have more flexibility to trade over the next week than to try to predict the outcomes of these uncertain events.

More Crumbling....

With buyers on the CBOT due to non-commercial short-covering ahead of the USDA report Thursday and also an annual commodity index rebalancing, the MGEX did not keep pace in today's rally. But maybe it's worse than that; the cash market premiums have fallen just as fast and the calendar spreads' backwardation has nearly disappeared.

So...not much demand for cash spring wheat and futures markets focused on buying CBOT has been a recipe for disaster for long MGEX/short CBOT positions like mine. Oh dear.
I've cut half of it and kept only July12 MGEX--which is at a reasonable $1.20 premium at this stage. At least i think it's reasonable

MGEX Premium Crumbles

After yesterday's hard sell-off in March12 MGEX futures, it wasn't surprising to see that the weekly inventory numbers from Duluth showed that wheat is building there and not moving out. http://www.mgex.com/grain_historical.html

The price action in MGEX wheat yesterday was also crushing for the hopes of MGEX longs--a big move up early only to fail spectacularly into the close. Misery.

So March MGEX has lost $1 versus CBOT in about 6 weeks. Dump it? Well, I think no. The short-covering on CBOT has run perhaps half its course, while net longs at MGEX at very low. Inventories are still quite small for Spring Wheat while overall wheat inventories at very high. I like MGEX to outperform at paying $1.20 to $1.30 premium for July doesn't seem excessive when cash market premiums ares till $2.20 to $2.30.

Sticking with the MGEX.

More Pressure on MGEX

MGEX wheat didn't see any love today. While KC added 13 cents and CBOT added 7-8 cents, MGEX dropped 6 cents. The front of the MGEX curve was a bit weak too--both March/ May and May/July dropped a penny or two.

So now March MGEX is under $2.00 premium to CBOT and July is under $1.30 premium. I'm still betting it's a bargain here. The MGEX calendar curve is still strongly inverted and there is not some crazy stampede into CBOT (as in the 2010 Russian drought. MGEX wheat is the only wheat market in short supply. Is $1.95 premium too much? Maybe, but this is down from $2.70 premium for March just 6 weeks ago, so there is certainly less built into it now.

Happy New Year!

Some Pressure on MGEX

The cash premium for Hard Red Spring wheat has declined to around $2.40 over Soft Red Winter, and July MGEX has dropped to less than $1.40 over CBOT. However the calendar spreads are still quite firm for MGEX and Duluth inventories continue to decline.

At this point I still believe that there is some short covering on CBOT that is forcing that market upwards more quickly than MGEX. But it has been a somewhat painful theory for the past week.

My biggest current worry would have to be rebalancing of commodity indexes next week which could spur significant CBOT buying. Oh dear.

And Now into Both MGEX and KC

With July MGEX at just over $1.50 over CBOT and July KC at only 35-36 cents over CBOT, I am long both the hard wheat futures. Cash markets for spring wheat are at least $2.50 over soft winter wheat and hard winter has at 50 cents premium to soft winter, so the forward levels are reflecting the steeper contango on the CBOT.

I suppose the theory is that higher nearby prices will kill demand for the hard wheats and so cash prices for them will ease relative to the CBOT's soft winter wheat as July delivery approaches. Essentially, the market is rationing the hard wheat efficiently and premiums will decline over time.

I'm not sure that's happening. Seems more likely that the relative shortage of hard spring MGEX wheat is forcing the backwardation to increase on that curve, while the CBOT curve indicates that market will stay well supplied right through harvest. It is just a lack of speculative capital that allows that MGEX contract to trade at such a small premium to CBOT out in July.