wheat spreads

local · Feb 7, 2011

Quote from GiantHogweed:

Local,

I was long a KW/W for most of the second half of last year (one of my best wins for the year) but closed out my March spread around the first of the year thinking that the March spread 30+ year high is @ 90. The Dec spread also is close to the 30 yr high. May, July are not nearly as close. Three questions:

1) How much do you think these 30 yr high affect these spreads generally?
2) Do you think the funds piling in these days renders the highs as resistance irrelevant ?
3) What do you think causes the various spreads to behave differently in terms of the 30 yr highs? In other words, will May be more likely to approach its highs when it is the front month?

Thanks,
GiantHogweed

Just my personal opinion, but I think the intercommodity spreads that the market has become accustomed to have changed for a few reasons.
1) In cases where one of the contracts of a intercommodity spread is not functioning properly (eg wheat, crude) the market may expect recent highs to be challenged. An extreme example is what happened to the Minni wheat in 2008.(Don't know all the details of what happened, but am sure it was a large commercial(Canadian) that was short and a fund that was long, someone else may provide more insight).
2)Funds treating grains as an asset class may challenge those contracts that have vulnerable specifications. This is not neccessarily limited to contracts with smaller open interest, for example a limitation of the crude contract has changed its intracommodity spreads as well as its intercommodity spreads.

Re May KC/W, I think this spread could work well going into the new crop months,
1) extremely poor crop ratings for HRW,
2) low carryout for milling wheat (read something about milling wheat contracts in Europe inverting last week)
3)very high possibility of HRSW areas of North Dakota and Canada experiencing significant flooding this spring. Besides reducing acreage it increases the possibility of frost damage for the acres that are seeded late.

Re KC/W spread, if you believe in seasonality of this spread, I do know that the time to put this spread on is the beginning of Sept.Personally I believe in price telling me when to enter a spread and less on seasonality. Should the z/z get close to even money I think it would be a great opportunity to put a long term spread on, if only for the reason that you can roll your short position at a much greater level than you have to roll your long, i.e. you are increasing your average short price with each roll more than you are increasing the average price of your long. Take a look at what the H/K in cbot and Kc is trading at right now to understand. The one thing that may change that is an increase in KC storage rates.

Regards, local

local · Apr 5, 2011

Quote from local:

Re May KC/W, I think this spread could work well going into the new crop months,
1) extremely poor crop ratings for HRW,
2) low carryout for milling wheat (read something about milling wheat contracts in Europe inverting last week)
3)very high possibility of HRSW areas of North Dakota and Canada experiencing significant flooding this spring. Besides reducing acreage it increases the possibility of frost damage for the acres that are seeded late.

Re KC/W spread, if you believe in seasonality of this spread, I do know that the time to put this spread on is the beginning of Sept.Personally I believe in price telling me when to enter a spread and less on seasonality. Should the z/z get close to even money I think it would be a great opportunity to put a long term spread on, if only for the reason that you can roll your short position at a much greater level than you have to roll your long, i.e. you are increasing your average short price with each roll more than you are increasing the average price of your long. Take a look at what the H/K in cbot and Kc is trading at right now to understand. The one thing that may change that is an increase in KC storage rates.

This spread continues to widen for the reasons sited above, crop ratings support buying kc/cbot wheat, despite being at histroical levels. Another year of tight quality wheat.

Regards, local

Regards, local [/B]

ogarbitrage · Apr 5, 2011

Quote from local:
1) In cases where one of the contracts of a intercommodity spread is not functioning properly (eg wheat, crude) the market may expect recent highs to be challenged.

Regards, local [/B]

You mean the crack spreads blowing out?

local · May 12, 2011

Cbot wheat spreads continue to widen N/Z trading out to 1.03 today. As mentioned above this is largely the result of the implementation of the VSR by the CME. This is significant to the longs because it simply means that it is costing more and more to maintain long term positions. Longs established a year ago are probably at close to beakeven levels. That has got to be extremely disapointing to longs especially in a year of "soaring food prices". With rumors of a large corn fund bowing up this week, one has to wonder if the wheat index funds are next.

Regards, local

TraDaToR · May 12, 2011

Local, do you have a feeling about Dec11/Mar12 wheat spread? I am long Mar / short Dec since march and seasonals are telling me to stay in.

local · May 12, 2011

The Z/H should continue to widen if only because of the VSR. Until something changes, by that I mean the index funds liquidate, there is little reason for the spreads to tighten up. There will obviously be weather scares this summer and if you recall when that happened last summer wheat spreads inverted. However now that we have traded for the past year with the VST, I think the influence of the VST will view inverses as selling opportunities. Also we still have a large carryout to deal with 600-700.

Further to the VST, if regulators really want to discourage excessive speculation in oil etc., all they have to do is use the wheat contract as a model and implement the VST(tongue in cheek). Forget about position limits.

TraDaToR · May 12, 2011

Thanks. I need to educate myself about the VST.

emg · May 12, 2011

Quote from local:

The Z/H should continue to widen if only because of the VSR. Until something changes, by that I mean the index funds liquidate, there is little reason for the spreads to tighten up. There will obviously be weather scares this summer and if you recall when that happened last summer wheat spreads inverted. However now that we have traded for the past year with the VST, I think the influence of the VST will view inverses as selling opportunities. Also we still have a large carryout to deal with 600-700.

Further to the VST, if regulators really want to discourage excessive speculation in oil etc., all they have to do is use the wheat contract as a model and implement the VST(tongue in cheek). Forget about position limits.

local is right.

local · May 12, 2011

Quote from TraDaToR:

Thanks. I need to educate myself about the VST.

Maybe I can save you a little time. This is my take, correct me if I am wrong. Essentially what the vst does is allow for storage rates to be increased by 3 cents/month when the preceding spread is at or greater than 80% of full carry. E.G. If the cme uses 35 cents for the last spread (K/N), storage rates for the N/U should be allowed to increase 6 cents to 41 cents. Currently the n/u is closer to 47, which seems a little wide. Was at 41 earlier in the week. Anyways, what this does is increase the storage rates in perpetuity so that the long is never quite sure what it is going to cost to roll the position. Should be noted that storage rates can decrease if spreads are at 50 % of full carry.

Note, for anyone that trades commodities and disreguards the role carrying charges plays in determining how spreads are determined (B_n_), you are neglecting some of the very basic theory that has evolved with the trading commodity futures over the past 150 years.

In my opinion (and backed by any long)the VST is proving to be a disaster. It was ill concieved and will probably end will the long liquidation of the index funds. On a day like today it almost feels like the liquidation has started.

Regards, local

benwm · May 18, 2011

Thanks local for this thread, there are some interesting points along the way...

I wondered if you had you ever traded LIFFE or MATIF wheat contracts and spreads versus Chicago and Kansas wheat?

It would interesting to hear more about your general approach to your trading day? What reports you look out for, any daily rituals you go through such as checking certain indicators, prices, webpages etc.

I would like to get started trading wheat/corn/beans, develop some kind of methodology, but wanted to get a handle on what the industry pros look out for, what drives prices in the medium term..