Why All the Love for KC Wheat?

As I reduce exposure to my long July MGEX vs CBOT position, I have added dribs and drabs of long MGEX/ short KC. At first I bought some Dec MGEX at 10 cents over KC. Then looking at the potential for steeper contango in the KC market (their storage goes to 9 cents/month starting in July, while MGEX stays at 5 cents), I decided that buying July MGEX vs KC was more attractive--especially at today's 16-18 cent premium for MGEX.

Is the Hard Red Wheat crop in bad shape? Sure. Is there going to be such a shortage of it that KC goes to a premium to MGEX? That may happen, but it won't be strictly due to an actual shortage. The KC futures are trading at over $1.00 premium to cash, while MGEX futures trade at a substantial discount to cash. So I think the July MGEX will stay at a premium to KC, these cash/basis relationships bear watching...

A Little Less Baggage Going into the Report

I took advantage of the rise in the July MGEX premium to CBOT up to 1.33 to reduce my exposure going into tomorrow's USDA report. I still have more than half of the position, and I also have a little more flexibility.

Here Comes the Crop Report

MGEX wheat looked like it would be the best performer at the open today, opening 3-4 cents stronger than KC or CBOT, but gave most of that back by the close. In fact, by the end of the day, MGEX was lower against the KC while maintaining gains against CBOT. My guess is that these movements are nearly random as market participants adjust toward the positions they want going into the USDA numbers coming out Thursday.

Being long May/short July MGEX was a thorn in my side today as the spread drifted toward 10 cents contango. Well, that stinks.

Though I don't have any position, the July/Sep rice remains interesting with a 17 cent range over the last 2 days. Since May/July has had only a 1 cent range, it seems clear this is not about supply/demand of rice, but about the particulars of the warehouse receipts and the new contract specs.

Staring Blankly at the Screen

Didn't come close to doing any trading today. July MGEX/CBOT spread continues to push the high end of the range around 1.22-1.24 premium, but certainly no desperation showing. Market is still comfortable with May MGEX at around 8.5 cents discount to July. I don't know how to reconcile that with the premiums paid for cash Hard Red Spring wheat...but there it is.

With corn futures falling over the last 2 days, there has been a modest bounce in the values for oats and wheat vs corn, but it is too little and much too late me on those trades. In retrospect, perhaps I should have been more cautious on those relative value trades, since the valuations were only attractive on the old crop corn. In other words, the rolling the short corn positions forward was always going to be very painful, so time was not on my side. And when you're putting on a "mean-reversion" trade, you really want time on your side.

The Wrong Trading Strategy...

For a couple of weeks the intermarket wheat spreads have been oscillating around the same levels. For those two weeks, I have been looking for MGEX wheat to break out to stronger levels against the CBOT and the KC. It's been frustrating.

The thing is...it's pretty hard to take 1-2 cents out of the market on these spreads. If they move against you, the losses can be substantial ---and even if you have just the right day-trading idea, the execution slippage and brokerage can eat up a fair portion of the profits.

So while it would be great to pull a few cents out of the market when the MGEX/CBOT spread trades in a 5 cent range for a few days, for me the risk/reward isn't good.

The Price of Indecision: 5 Cents.

As I mentioned yesterday, I want to put on some long July MGEX wheat / short KC for similar reasons to my positioning in MGEX/CBOT. The carry cost for KC goes up starting in July to 9 cents/month while MGEX stays at 5 cents/month. Also, cash Hard Red Spring wheat is about $2.00 over Hard Red Winter wheat, so I think time is on my side buying the July MGEX at only a bit over 30 cents/bushel premium to KC...but I could have had it yesterday a nickel cheaper.

Sure, the risk is still there, but I don't have to hold it for 20 cents against me, I can exit sooner if i like (hopefully).

Wheat Update and Some Chat on Rice Futures

I topped up the long July MGEX vs CBOT intermarket wheat spread yesterday at the dip on the close. And over yesterday and today, continued to liquidate, painfully and reluctantly, the short corn positions against CBOT wheat and oats.

I started to put on a long July MGEX/short KC wheat position today but was too shy to pay much over a 25 cent premium for MGEX. I only got a little bit and then I took the day-trade profit as the premium neared 30 cents. There is a similar case for this position as my current MGEX/CBOT spread. The reason I lost my nerve on this is that it concentrates too much risk on the MGEX contract when added to the existing positions.

Considering the turmoil and fighting in the Middle East and North Africa along with the ongoing disaster in Japan, it's surprising there is so little volatility in commodity markets over the past few days...

Though I try to stay focused on wheat trading in this blog, I have been doing some trading in CBOT rice and it's been... ummm, fascinating. The basic story is that March/May rice traded out to full carry and I thought I could make a little extra by taking delivery. As I got more involved in watching the spreads in rice, the July/Sep spread went to what appeared to be shocking levels for the carry trade. It took a couple of weeks for me to hear back from the exchange after I asked about changes in contract specs (and google searches didn't help). Anyway, there are new specs going into effect there on September 1 which will impact the valuation of warehouse receipts from the Sep contract onwards--though it won't affect the eligibility of any receipts. The effect will depend on the particular receipts with the highest quality specs being hit the hardest --something like a 4% hit to the values there. So everyone should be trying to unload their high quality rice receipts before September, because after that you won't get nearly as much premium for the the "head count." My guess is that the July/Sep spread there could be quite volatile since the worst case pricing is around 95 cents premium Sep, but there is no certainty over the receipts you could get. The typical receipt would be worth about 40 cents less if delivered in September, so that would put the July/ Sep spread at around 70 cents for full carry.