corn spreads

Local, it looks to me like flat price Dec 10 Corn wants to test the recent contract highs.

However, the Dec 10/Dec 11 Corn spread looks to still be in a consolidation pattern.

So, I am not looking to buy the Dec 10/Dec 11 Corn spread until it closes above 40.0 over.

Would you care to elaborate on the changing fundamentals for Dec 10 Corn?

Thanks!
 
Dec 10 Corn flat price tried to push to new highs today, but still looked rather weak.

It looks to me like the Dec 10/Dec 11 Corn spread is still consolidating.

I am looking for a close in the Dec 10/Dec 11 Corn spread above 41 over before I think about getting long.
 
Quote from local:

When I traded as a local, there was always time to bs with the other guys in the pit. I miss that with electronic trading, so this is a bit of an outlet. This is a tough way to make a living, so I respect all that try. Less respect for the scammers and those who do not reply respectfully. Anyways back to spreads, I believe that having a basic fundamental approach to spreads will make you a better trader, including being able to formulate an understanding of flat prices. Let me tell you a grain trading story to get my point across. Several years ago, Jim Rogers (the guy with the funny bowtie) initiates a long position in a contract that I have traded on and off for the last 25 years. He is trading a fund of hundreds of millions, maybe billions, and wants to own commodities. His theory is sound, China is going to increase demand etc. Anyways he ends up owning half the open interest.
Now I know from the specifications of this contract that he can't stand for delivery (very restrictive position limits for delivery month) so I short the spreads because I know he is going to sell them back to me at full carry when he rolls hhis position. I do this for about five years, every delivery month, works like clockwork. Eventually, Rogers gives up, liquidates his long position and loses significant capital simply because he doesn't know the specifications of the contract and how it would affect the spreads. He may have established the long position for the right reasons but didn't understand how a spread would work against his theory.

regards,local.
More...

To local:

I'm a newbie in spread trading. Thx for sharing your trading story. It's a genius play against Roger. Btw, just curious how do you know he had taken half of the open interest, pit gossip?

I just started trading bean spread n1- x1 like you mentioned. Missed its 15s level couple months ago and got really pissed off. You mentioned bean old crop spread is tightening lately. Why? I'm trying to explain it from theoretical perspective. Is this the right way to understand it?

My understanding of commodity spread is it basically consists of two components: cost of carry(storage, interest, duration of spread ...) and carry(ppl's wanting of physical products in front... hard to measure if you know let me know). So is this the right framework to understand recent narrowing old crop spread in beans?

thx

LucasX
 
Quote from LucasX:

To local:

I'm a newbie in spread trading. Thx for sharing your trading story. It's a genius play against Roger. Btw, just curious how do you know he had taken half of the open interest, pit gossip?

I just started trading bean spread n1- x1 like you mentioned. Missed its 15s level couple months ago and got really pissed off. You mentioned bean old crop spread is tightening lately. Why? I'm trying to explain it from theoretical perspective. Is this the right way to understand it?

My understanding of commodity spread is it basically consists of two components: cost of carry(storage, interest, duration of spread ...) and carry(ppl's wanting of physical products in front... hard to measure if you know let me know). So is this the right framework to understand recent narrowing old crop spread in beans?

thx

Re Jim Rogers, the allocation of capital to each commodity is listed on his website. I suppose that the fund is mandated to disclose this info but it can and is used against them by the rest of the market.

re spreads, cost of carry is made up of storage plus interest. Easily determined. Obviously storage makes up the most significant portion of carry with low interest rates. Hasn't always been that case. You really should know at least the basics about carry before putting on a spread.

reagrds, local
More...
 
Local storage for corn = 4 cents a bushel per month. So the real cost of storage is probably 6 cents.

Dec 2010 Corn is at 582 1/2

May 2011 Corn is at 601 1/2

19 cents won't cover the costs
 
Re Jim Rogers, the allocation of capital to each commodity is listed on his website. I suppose that the fund is mandated to disclose this info but it can and is used against them by the rest of the market.

re spreads, cost of carry is made up of storage plus interest. Easily determined. Obviously storage makes up the most significant portion of carry with low interest rates. Hasn't always been that case. You really should know at least the basics about carry before putting on a spread.

reagrds, local [/B][/QUOTE]

Here is my future 101 class understanding... correct me if im wrong.

future = spot + cost of carry - carry(beneficiary factors for holding the physical)
This is at least what I was taught by a CME guy.

spread for intra commodity contracts has the same relationship listed above.
Spot is the near month, future is further month. (at least for the same crop year spread)

So local, what im asking is how we can explain what we both had seen - the old crop bean spread was narrowing in the last 3 days. I want to hear your opinion.

Just my way to understand the fact. Maybe you can tell me funds were bidding up new crop more than old crop. you said you wish you could long jan 11 short nov 11 bean spread instead of july nov spread.

btw, agri pit is really a small world. I happened to know a few guys still there.

Thx

LucasX
 
Quote from LucasX:

Re Jim Rogers, the allocation of capital to each commodity is listed on his website. I suppose that the fund is mandated to disclose this info but it can and is used against them by the rest of the market.

re spreads, cost of carry is made up of storage plus interest. Easily determined. Obviously storage makes up the most significant portion of carry with low interest rates. Hasn't always been that case. You really should know at least the basics about carry before putting on a spread.

reagrds, local
More...

Here is my future 101 class understanding... correct me if im wrong.

future = spot + cost of carry - carry(beneficiary factors for holding the physical)
This is at least what I was taught by a CME guy.

spread for intra commodity contracts has the same relationship listed above.
Spot is the near month, future is further month. (at least for the same crop year spread)

So local, what im asking is how we can explain what we both had seen - the old crop bean spread was narrowing in the last 3 days. I want to hear your opinion.

Just my way to understand the fact. Maybe you can tell me funds were bidding up new crop more than old crop. you said you wish you could long jan 11 short nov 11 bean spread instead of july nov spread.

btw, agri pit is really a small world. I happened to know a few guys still there.

Thx

LucasX [/B][/QUOTE]

future=spot plus carry as you approach first delivery day (in theory commercials can arbitarge cash and futures which forces convergence). Can get very distorted prior to approaching delivery, in theory.

Trade uses old crop/ new crop as a proxy for ending stocks. Bean spreads at large inverses because ending stocks are now projected to be very tight, because Chinese are buying on a daily
basis, crush is very good. Support in new crop not necessarily funds (funds are usually buyers of most liquid, nearbys), could just as well be crushers. I have traded ags fro 27 years, I know how small it is.

Regards, local
 
Quote from dafeeder:

Local storage for corn = 4 cents a bushel per month. So the real cost of storage is probably 6 cents.

Dec 2010 Corn is at 582 1/2

May 2011 Corn is at 601 1/2

19 cents won't cover the costs
More...

Z/k corn has traded today between 19 1/4 and 18 3/4 today. I use 6 cents /mos to approx. carry (to be more precise you have take into account when first delivery day is, does it fall on weekend, and how many days in month). For arguements sake use 6 cents. Buying the spread at 19, you are risking 11 cents, carry is 30. Not bad, buying a spread like this is one of the only ways you can quantify your risk ( not including options). In theory unlimited upside, losses limited to 11 cents (witness Z10/Z11 corn, traded at 38 under during summer when market was penciling in a 165 yield, now at 40 over. Not a bad risk/ reward scenario.) Problem with old crop corn spreads is that everyone knows funds are long 400.000 contracts and shorts just wait for them to roll. Not really much opportunity.

Regards, local
 
Quote from dafeeder:

Local storage for corn = 4 cents a bushel per month. So the real cost of storage is probably 6 cents.

Dec 2010 Corn is at 582 1/2

May 2011 Corn is at 601 1/2

19 cents won't cover the costs
More...

as of now, there is no full carry yet. the market wants corn now.
 
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