Adding and Adding

Sep CBOT wheat has dropped to 42 cents under December. There are likely over 100,000 Sep CBOT contracts still held by passive index investors and that accounts for the bulk of Sep long open interest and they are paired up with commercial hedgers that are short. It seems to me that it is quite possible that the Sep will trade down to the VSR full carry at 63 cents under December. So I added to that calendar spread position.

Nearby Sep MGEX wheat continues to show strength, now trading at a small premium to December. So with that bullish indication in the front end of the market, I added a new long Dec MGEX, short Dec CBOT position to my existing long Dec MGEX/short Kansas City position.

Why Is September MGEX Wheat So Tight?

Even as the price of September MGEX wheat has declined on an outright basis by $2/bushel over the last 2 months, the Sep/Dec calendar spread has continued to indicate a tight supply with Sep closing even with December today--the same level that spread traded when the outright market was $2 higher. Crop ratings remain pretty good. The decline in deliverable stocks at Duluth and Minneapolis has abated. It doesn't look like we're going to run out before the harvest comes in...so why isn't the market charging anything to store the harvest through December?

Hmmm...

Also Adding MGEX on Weakness...

The MGEX/KC intermarket spread has been in a narrow range for the past few days. Demand for Sep MGEX still seems strong with the Sep/Dec calendar spread trading at just 2-3 cents discount for Sep. KC, on the other hand, is trading out at over 80% of the new KC full carry (9 cents/month storage rate from July to Dec). So, for now, I am sticking with the long MGEX/short KC position.

On the CBOT wheat, the Sep/Dec calendar spread has gone to steeper contango with Sep more than 40 cents under Dec--about 62% of the VSR-defined full carry. While I don't know if that spread can average over 52 for the VSR calculation period (which could bump the full carry number up to about 73 cents), I am adding a bit to that short Sep/long Dec position.

Adding MGEX on Strength

With Dec MGEX advancing back over 40 cents premium to KC, I added to that position.

In the calendar spreads, we see CBOT Sep/Dec wheat is not close to the VSR maximum carry for the period. Full financial carry is about 64 cents now, and the VSR bumps that up to 73 cents if the spread averages over 52 from now to the end of August. That spread went to a steeper contango today with Sep falling to a 38 cent discount; I'm betting that spread gets out toward those full carry numbers.

Can't Wait Forever...

After touching a 70+ cent premium to KC last month, Dec MGEX retreated all the way back to a sub-30 cent premium. I jumped in to buy some at a 40 cent premium today.

I always like to have a long MGEX position on, and I am wary of shorting the Dec CBOT which still seems poised to rally. Non-commercial traders are short CBOT and CBOT is very cheap compared to corn.

Watching and Waiting Some More

After scratching my intermarket wheat spreads, here's what I think now:

Corn is driving the market. As corn goes higher soft wheat gets pushed higher--the DTN cash index for soft wheat is 33 cents under corn as it is. Last month we saw Pilgrim's Pride announce that they are feeding wheat to their chickens. Today we see that The Anderson's is blending soft wheat into their corn at their ethanol plants.

CFTC COT reports showed non-commercials short the CBOT soft wheat contract, while the non-commercial long positions in MGEX hard wheat remained relatively intact. So while desperate shorts may be covering on the CBOT, there aren't many shorts at all on MGEX (and few on KC) to drive those markets.

So the effect of higher corn prices right now is to diminish the premiums for higher protein wheat.

The problem with trading on this market dynamic is that it requires one to anticipate the price of corn. I don't want to make a big bet on higher corn...or lower corn. So, I'm going to watch and wait for a while.

Grinding Through the Cheap Wheat

Following up on yesterday's idea that wheat is very cheap compared to corn and therefore seeing extra demand, we saw CBOT wheat get dragged higher with corn today. While Dec CBOT wheat did not improve versus corn (it dropped another 7 cents/bushel), Dec CBOT did outperform its counterparts on the MGEX and KC. The market moves today showed that substitution versus corn is pushing the low-protein end of the wheat spectrum higher.

At the high-protein end of the spectrum, July MGEX still trades at 30 cents over Sep and there are 1100 open contracts with only 1 week to the last trading day. So, at the bottom there is demand for CBOT and at the top there is but limited supply of MGEX. In the middle, there is no love for KC--while the Hard Red Winter wheat crop will be small in the USA, the KC contract is competing seemingly large crops from the FSU for export sales. As it sounds, I am long MGEX and CBOT against the KC.