SMall Trades for the Shorter Term?

On the long wheat/short corn trade I put on yesterday, the idea was to scale into a position as wheat traded down from 1.25X corn toward 1.2X corn. When wheat traded up today, I took the 8 cents and got out. I will still look to buy the wheat when it gets cheaper.

Small Trades for the Longer Term

Today I put on a few positions that I think will work out over weeks or months rather than days:
Long March Oats, short Corn.
Long March Wheat, short Corn.
Long March MGEX Wheat, short KC Wheat.

In the first two cases, we are above rock-bottom levels where feedlots would substitute for corn, but not by more than maybe 10%. Certainly there is at least twice that room on the upside.

In the second case, we see a similar set-up; there may be 15-25 cents of downside, but MGEX could easily be 50-70 cents over KC instead of the current 14-15.

The risk to all the above trades is a rampant bull market that attracts more speculation to corn and KC wheat than the less liquid oats and MGEX markets. A good offset to that risk would be to scoop up some calendar spreads at close to full carry, so I'll be on the lookout for that going forward.

Exiting Early

I am writing this wrap-up a little early because I have exited my intermarket MGEX/CBOT spreads. With the cash Hard Red Spring wheat trading $1+ over Soft Red Winter wheat, it looks like the March MGEX/CBOT spread has a lot of room to run from the current 65.5-67 cents. So I might be leaving this winning position too early--and I may eventually jump back in to go long the MGEX at even higher levels.

But this spread has had a 25 cent move over the last 10 sessions as the CBOT March contract has dropped a dollar. This kind of move cannot be explained as the impact of the VSR: too much, too fast, and no corresponding calendar spread moves. I don't think we are moving into a bear market with a lot of downside, so I don't want to depend on continued CBOT liquidations to pry the MGEX/CBOT spread to higher numbers. Rather, I fear that speculators will come back into the grains and the MGEX premium will (initially at least) get squeezed.

MGEX Premium Expands

One again CBOT wheat closed within a penny of the previous day, but today MGEX was up a nickel. I don't see any particular reason for it. Calendar spreads didn't move much on the CBOT or the MGEX. Perhaps there was some selling on the CBOT related to weakness in other markets like the S&P500 or corn or crude oil... It's nice to be the beneficiary of random moves, but it's not enough to get me to give up my long MGEX/ short CBOT position.

Another Good Day for ....Long Term Research

The wheat futures spent the day within about a nickel of unchenged for most of the day and intermarket and calendar spreads only shifted a penny or two.

So I begin to creep back into my usual long MGEX/ Short CBOT stance.

As wheat trades toward the low end of the range since the summer Russian drought, and corn is at the lowest levels since we found out yields would be lower than expected, I am looking for longer term bull market trades. Ideally that would be putting on a calendar spread around full carry just before the next harvest. I don't see that, but KC May10/July10 with a 6 cent discount for May (about 50% of full carry) doesn't look too bad as a bull market option. While wheat inventories aren't as tight as corn, you would have to pay over 20 cents premium for Sep10 corn over Dec10. If the grain markets soften, there is only a 6 cent downside on the wheat spread, but about 35-40 cents at risk on the corn trade.

Nick H., Fixed the Link!

Ethanol subsidy story link here.

I don't see where the study cited by DTN looks at competition from refined sugar markets. Interestingly, the study seems to pencil in the same "ethanol crush" margin in both subsidized and non-subsidized scenarios.

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