Whither Dec/March Calendar Spreads?

Is there any way that Dec/March won't be at a full carry on all the exchanges eventually?

While the MGEX Sep/Dec tightened a dime over the course of August, to less than 5 cents/bushel--and 10 cents less than the cost of carry, KC and CBOT spent much of the month at around the cost of carry. And it was a big 31+ cent carry on the CBOT. And these carries were at a time when wheat has stayed at prices around 50% higher than 3 months ago.

What kind of bull market would it take to prevent the Dec/March (and further out spreads) from falling to the same full carry?

Light Posting Due to "Vacation"

Still maintaining positions and following the markets, but won't be back to regular postings for a week or so...

Reading up on some research reports (hat tip to BMH), I was struck by the lack of understanding of the CBOT's new VSR (variable storage rate) regime. Even top research professionals seem confused by some of the details. For example, while the storage rate increases are triggered by spreads averaging over 80% of full carry (within a certain time period), storage rates do not drop if the spreads are under 80%--the spreads have to be below 50% of full carry (during the appropriate time period) to trigger a drop in the storage rate.

With CME shares down almost 30% so far this year, I guess they have other things to worry about besides publicizing an obscure delivery rules change, but still...

More Bear Market Dynamics

We saw wheat down 15-20 cents for most of the day and the intermarket spreads and calendar spreads responded predictably: MGEX Sep wheat strengthened to 42 cents over CBOT while calendar spreads drifted towards steeper contango. While we are mostly trading Dec wheat, I note the Sep level because as that spread collapsed in the "Russian spike" I thought we would see it return to 75 cents premium--we may see it yet. Of course, that doesn't really matter if you've stopped out at lower levels, but it's still worth noting. Note also that the Sep/Dec spread is very tight on the MGEX and it makes the Dec MGEX at 12 cents over CBOT look pretty attractive.

Ethanol still very strong with Sep at 9-10 cents over October and at a premium to Sep RBOB gasoline. While ethanol looks pricey vs gasoline, the nearby month strength and cheapness vs corn make it an attractive buy out toward the Dec contract.

Some Speculation on Ethanol

With all the action in wheat, the ethanol market has not received much attention. But an interesting situation has developed: The front month, September, is trading at 9 cents (5%) over October. Inventories are stable. Usage is declining as the summer driving season draws to a close.

Ethanol inventories nationwide were at similar levels when I took delivery just last Spring because the front month was at a 3 cent discount (yielding 3.75% annualized on cash for a month). Demand for ethanol rises through the summer with gasoline demand, but August averaged only 3 cents over Sep--and that seems high.

So either there is a localized shortage at exchange delivery points or there is a real market anomaly here. If there is not a localized shortage, that would indicate to me that there is speculation on a regulatory action raising the 10% blend wall. I'm looking into the exchange inventory situation...Meanwhile, I bought some Dec Ethanol vs Corn.

Short Day

I have been trying to add to the intermarket position, long hard wheat vs short soft, as the market has settled a bit over the past 2 weeks. The levels are not as attractive as they were in the peak chaos during the first week of August, but there is, perhaps, a smaller chance of being forced out of the position. I still favor the intermarket spreads as being more less directional than the calendar spreads, at least from now going forward.

While I do not have a crystal ball to predict Russian weather, I think wheat market participants will look back at this summer's run-up in prices and see them as primarily technical (large non-commercial short position in June) and political (Russian domestic decision to suppress exports) rather than driven by physical supply and demand.

Wheat, and Wheat Spreads, Bouncing

It didn't take much to get the calendar spreads like Dec10/July11 moving back to backwardation. July wheat was up about 3-4% on the day, which is about the price variation we see now in the first 15 minutes of trading on the CBOT, and that was enough to convince the market that buyers would pay a premium for the privilege of holding wheat in storage for 7 months. Hmmm, we'll see how that works out for the holders of CBOT shipping certificates for the period.

On the intermarket spreads there was much less movement. KC and MGEX are both holding slim premiums to CBOT so far through this 2 day rally. Since the wheat rally is based on the idea of huge US exports to North Africa/Middle East, it will be interesting to see how much export "pull" there is on cash Soft Red Wheat. The DTN cash indexes for Hard Red Winter Wheat and Hard Red Spring Wheat bottomed out vs. Soft Red Winter Wheat in the first week of this month and have since rallied about 40 cents on the spread. Yet with HRW still 30 cents under SRW, it still looks cheap.

The argument for the relative strength of SRW in the cash market was that it was being held back by the high storage rates implied by the CBOT. With the CBOT now having swung all the way to backwardation for Dec10/July11, it is hard to see why SRW should command a premium in the cash market as the implication is that the SRW will come out of storage.

Waiting for the Ukrainian rain.

Not much to talk about today...

Will see how things look tomorrow with the rain falling in Russia.