Tuesday, June 29, 2010
Nothing Special Today
Wheat futures were down just like everything else that isn't yellow and shiny. There was some movement in calendar spreads to steeper contango. The intermarket wheat futures didn't show much direction, but that's a little surprising; a strong down day, particularly a day when the price drops are due to stronger USD and weak equity/risk markets as opposed to weather factors, would likely draw more selling into the CBOT than KC or MGE. So the fact that KC and MGE didn't strengthen their premiums to the CBOT is a bit disappointing.
Monday, June 28, 2010
To Answer Friday's Question...
There was short-covering in wheat by trend-followers in the recent CFTC COT report, but that report was only through Tuesday and the market didn't really turn down until later in the week....
Anyway, new week but MGE Spring Wheat futures still the weakest. After a couple of days on the sidelines, we are tip-toeing back in. Trying to get back to the fundamentally appealing trades, we mostly bought July11 MGE at 16-17 cents over CBOT (July10 topped out at about 80 cents over). As usual, I am wary of being short CBOT futures a year forward as the contango could steepen and drive the forward prices up, but we also added to our CBOT calendar spreads (sold Sep10/ bought July11)to offset this concern.
Ethanol managed to get a bit cheaper; it dropped more than corn and more than gasoline. It's hard to understand that kind of weakness when producer margins are low and the nearby ethanol market is in backwardation. Although it's not really my specialty, for my personal, non-wheat, non-spreading account, I am outright long a few ethanol contracts.
Anyway, new week but MGE Spring Wheat futures still the weakest. After a couple of days on the sidelines, we are tip-toeing back in. Trying to get back to the fundamentally appealing trades, we mostly bought July11 MGE at 16-17 cents over CBOT (July10 topped out at about 80 cents over). As usual, I am wary of being short CBOT futures a year forward as the contango could steepen and drive the forward prices up, but we also added to our CBOT calendar spreads (sold Sep10/ bought July11)to offset this concern.
Ethanol managed to get a bit cheaper; it dropped more than corn and more than gasoline. It's hard to understand that kind of weakness when producer margins are low and the nearby ethanol market is in backwardation. Although it's not really my specialty, for my personal, non-wheat, non-spreading account, I am outright long a few ethanol contracts.
Friday, June 25, 2010
Specs Covering Shorts in a Down Market?
Why are the CBOT wheat futures falling less than MGE or KC? Could be short-covering from the trend-followers that are short. I dunno.
To put our recent losses in perspective, we lost about 8 cents on the intermarket Sep MGE/KC spread in a market where MGE dropped around 25 cents from the highs vs. the CBOT--our usual benchmark. We are 3-4 cents underwater on our CBOT calendar spreads (Sep/July11 and Dec/July11) on a move where the July10/July11 narrowed by almost 20 cents. So I was wrong on these spreads, but it could have been worse.
At the very front of the market, the July/Sep CBOT spread steepened back to 15 cents premium Sep--so the carry offers a tiny bit of yield in addition to storage costs of 14.5 cents. As we look out the curve, the Sep/Dec spread looks too narrow. As noted, the front July/Sep is at the VSR maximum storage rate; beyond the Sep/Dec, the Dec/March is trading 1-2 cents wider contango than Sep/Dec; since there won't be much new wheat in the fall, the supplies can only be lower in Dec; the implication is that Dec/March is steeper because the VSR maximum is potentially steeper for that period. If there is a belief that Dec/Mar should be steeper than Sep/Dec, then Sep/Dec would have to go to the VSR maximum of about 34 cents (27 today).
Lastly, ethanol is getting very cheap again. Controlling for energy content, nearby ethanol is less than 10 cents/gallon premium to gasoline. I don't believe that premium has gone negative for some time. Considering that by volume ethanol is around 60 cents/gallon cheaper than gasoline and there's a 45 cents/gallon credit to blend it, ethanol consumption should be at the maximum--not to mention exports setting new records. With the BP disaster ongoing, it is hard to see how a higher blend wall, at least to E-12, can be put off much longer.
To put our recent losses in perspective, we lost about 8 cents on the intermarket Sep MGE/KC spread in a market where MGE dropped around 25 cents from the highs vs. the CBOT--our usual benchmark. We are 3-4 cents underwater on our CBOT calendar spreads (Sep/July11 and Dec/July11) on a move where the July10/July11 narrowed by almost 20 cents. So I was wrong on these spreads, but it could have been worse.
At the very front of the market, the July/Sep CBOT spread steepened back to 15 cents premium Sep--so the carry offers a tiny bit of yield in addition to storage costs of 14.5 cents. As we look out the curve, the Sep/Dec spread looks too narrow. As noted, the front July/Sep is at the VSR maximum storage rate; beyond the Sep/Dec, the Dec/March is trading 1-2 cents wider contango than Sep/Dec; since there won't be much new wheat in the fall, the supplies can only be lower in Dec; the implication is that Dec/March is steeper because the VSR maximum is potentially steeper for that period. If there is a belief that Dec/Mar should be steeper than Sep/Dec, then Sep/Dec would have to go to the VSR maximum of about 34 cents (27 today).
Lastly, ethanol is getting very cheap again. Controlling for energy content, nearby ethanol is less than 10 cents/gallon premium to gasoline. I don't believe that premium has gone negative for some time. Considering that by volume ethanol is around 60 cents/gallon cheaper than gasoline and there's a 45 cents/gallon credit to blend it, ethanol consumption should be at the maximum--not to mention exports setting new records. With the BP disaster ongoing, it is hard to see how a higher blend wall, at least to E-12, can be put off much longer.
Thursday, June 24, 2010
More Struggles ...
The worst enemy of our strategy is low inventories. Short-covering rallies on the CBOT cause pain, as I think we saw today, but not permanent damage.
We junked the long MGE/short KC position.
I will look to re-establish a long MGE/short CBOT intermarket futures position sometime. I believe that the trend-following shorts have to exit the CBOT for the MGE/CBOT spread to be attractive to us once again. As long as the CBOT leads the rally, the calendar spreads we have (short the front/long the back) may cause some further pain..we don't need additional exposure to directional wheat trades right now.
We junked the long MGE/short KC position.
I will look to re-establish a long MGE/short CBOT intermarket futures position sometime. I believe that the trend-following shorts have to exit the CBOT for the MGE/CBOT spread to be attractive to us once again. As long as the CBOT leads the rally, the calendar spreads we have (short the front/long the back) may cause some further pain..we don't need additional exposure to directional wheat trades right now.
Wednesday, June 23, 2010
About as Happy as the French Soccer Team
Of the two main positions outlined in yesterday's post, the MGE vs KC is the one that does not really fit with our core mission of exploiting index traders and the VSR regime. The MGE vs KC position is much more predicated on knowing something about the wheat markets--maybe that's why it's not working. We held it today, but we will not keep it much longer unless the P&L starts to get real positive, real fast.
At the CBOT open, the nearby July/Sep spread narrowed to inside of anticipated exchange storage costs (14.5 cents)--from 15 cents premium Sep to only 12.5 premium. The market then drifted back to around 13.5 cents for the rest of the day. First Notice is about a week away and this is a surprising move that needs to be watched. Neither the MGE nor KC spreads exhibited any similar moves.
At the CBOT open, the nearby July/Sep spread narrowed to inside of anticipated exchange storage costs (14.5 cents)--from 15 cents premium Sep to only 12.5 premium. The market then drifted back to around 13.5 cents for the rest of the day. First Notice is about a week away and this is a surprising move that needs to be watched. Neither the MGE nor KC spreads exhibited any similar moves.
Tuesday, June 22, 2010
No New News
We have a couple of main positions: long Sep MGE/ short KC and short Dec10 CBOT/ long July11 CBOT. Both spreads stayed within a penny of yesterday's prices for most of the day.
On the MGE vs KC position, we are not in at some great level where we can relax and count on time being on our side. We are long at the highest level for that spread in months. The revelation that Canadian farmers didn't plant a big chunk of planned acreage has pushed MGE up by about 10-15 cents vs KC and CBOT and that premium has held up at these new levels for a good week now. The oats market is more sensitive to Canadian production problems than MGE Spring Wheat so I'm hoping the 5% rise on oats today, to new highs, is a harbinger of further MGE gains vs KC and other lower protein, winter wheat.
On the calendar spreads, we can be somewhat more comfortable, though there is no hard number supporting forward premiums. The winter wheat harvest is almost 20% complete with generally favorable weather conditions forecast for the weeks ahead. There is a large inventory of winter wheat and a good crop almost in the bin. While spreads have scraped themselves up off full carry at the KC (by a few pennies), there shouldn't be much concern over any shortage of winter wheat for a year at least.
On the MGE vs KC position, we are not in at some great level where we can relax and count on time being on our side. We are long at the highest level for that spread in months. The revelation that Canadian farmers didn't plant a big chunk of planned acreage has pushed MGE up by about 10-15 cents vs KC and CBOT and that premium has held up at these new levels for a good week now. The oats market is more sensitive to Canadian production problems than MGE Spring Wheat so I'm hoping the 5% rise on oats today, to new highs, is a harbinger of further MGE gains vs KC and other lower protein, winter wheat.
On the calendar spreads, we can be somewhat more comfortable, though there is no hard number supporting forward premiums. The winter wheat harvest is almost 20% complete with generally favorable weather conditions forecast for the weeks ahead. There is a large inventory of winter wheat and a good crop almost in the bin. While spreads have scraped themselves up off full carry at the KC (by a few pennies), there shouldn't be much concern over any shortage of winter wheat for a year at least.
Monday, June 21, 2010
Grains Flop First
Grains opened higher, presumably in sympathy with higher commodities and equities on the back of the Chinese Yuan news, and immediately headed back lower. The action in intermarket spreads and calendar spreads was mixed. We were able to add to our CBOT short Dec10/ long July11 spreads at close to the lowest premium levels for July11 seen for weeks.
At the front end of the market, July/Sep MGE spreads were trading very close to exchange storage costs and the rest of the MGE forward curve is at lower premiums than storage, so that would be the "tightest" market. As far as the CBOT vs KC forwards, it is like the tale of the Walrus and the Carpenter; the CBOT forward premiums are bigger, but the KC forwards are the most premium beyond exchange storage costs.
In general, exchange storage costs are below third-party, open-market storage fees. The last survey I saw pegged average "real" storage costs at about 7.5 cents/bushel/month, while the KC charges 4.5 cents, MGE charges 5 cents, and the CBOT will go to 8 cents starting July 19 and likely up to 11 cents in September. The VSR rules allow storage rates to rise 3 cents/month every expiration where the nearby spread is trading over 80% of the then current "full carry" (storage plus interest). It is possible, therefore, that storage fees will rise to 14 cents/month in December and more in March, and then May.... Eventually, it will be economic to move the grain out of CBOT elevators or something else will give, but there is still room for steeper CBOT contangos. While Sep/Dec should top out around 34 cents (currently 30), Dec10/July11 isn't capped until around 115-120 cents (currently 62). I expect the real storage and transport economics to keep the Dec10/July11 inside of that VSR maximum, but there could still be quite a bit of room to move.
At the front end of the market, July/Sep MGE spreads were trading very close to exchange storage costs and the rest of the MGE forward curve is at lower premiums than storage, so that would be the "tightest" market. As far as the CBOT vs KC forwards, it is like the tale of the Walrus and the Carpenter; the CBOT forward premiums are bigger, but the KC forwards are the most premium beyond exchange storage costs.
In general, exchange storage costs are below third-party, open-market storage fees. The last survey I saw pegged average "real" storage costs at about 7.5 cents/bushel/month, while the KC charges 4.5 cents, MGE charges 5 cents, and the CBOT will go to 8 cents starting July 19 and likely up to 11 cents in September. The VSR rules allow storage rates to rise 3 cents/month every expiration where the nearby spread is trading over 80% of the then current "full carry" (storage plus interest). It is possible, therefore, that storage fees will rise to 14 cents/month in December and more in March, and then May.... Eventually, it will be economic to move the grain out of CBOT elevators or something else will give, but there is still room for steeper CBOT contangos. While Sep/Dec should top out around 34 cents (currently 30), Dec10/July11 isn't capped until around 115-120 cents (currently 62). I expect the real storage and transport economics to keep the Dec10/July11 inside of that VSR maximum, but there could still be quite a bit of room to move.
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