Sunshine------The overall quality of the grain and excessive speculaton are ways to explain the differential. The spread ought to revert in due time.
unfortunately the newsletter doesn't specify which contract month to buy/sell. I looked up the prices for the KW (Kansas Wheat) and W (Chicago Wheat) for the next 2 years. For Sept '07, Dec '07 W trades at a premium compared to KW. For March '08 KW trades at a small premium to W (2 cents). However for the next contract month May '08 the situation is reversed again, W trades at a huge premium to KW (18 cents). Does anybody have an explanation for the KW and W prices for March and May '08? Thanks
Reasons? Besides the quality and speculation issues, it's possible that KC-wheat has less protein than normal because of the crop stress. That gets discounted in the market. I don't know the contract specifications for KC but I believe they do allow a wide range of protein content for eligible delivery. Lesser protein content grain tends to depress the price. Regarding the spread between WK8 and KWK8, May is a "swing month" in wheat. It can trade all over the place. The locals can push it around easier at this stage of its listing. I hope some of that helps.
This spread has reached something of a maximum today at >20c If you watched the expiry of N7 you would notice that KC was discounted to GX all the way to a few days before FND at which point as the specs got out and the physical reality showed up KWN7 went to a 14c premium to WN7 and eventually by LTD ended 9c over. KW can deliver against W contract but not the other way around as KW has higher protein content. Although it can clear at a discount I think it unlikely to clear in U7 or Z7. There is sufficient SRW and it is indeed the specs which keep buying up GX and disregarding the spread which are the primary culprit here. If you look at month end valuations ont he spread for Jun and Jul you will notice it gets whacked back in. As a trade I believe this will prve to be a good one but having the patience to put it on when it goes wide is key. In addition look at U/Z and Z/H calendars in GX wheat. U/Z trades 18 under and Z/H 5 over?? Anybody care to guess why this is and if Z/H can really stay inverted. If there is a real Wheat shortage why the big front end carry?
It might be similar to crude oil. There's something going on with the delivery locations being maxed-out for storage. It becomes easier to pressure the front-month September via bear- spreading and additional deliveries while the deferred months are "properly" inverted because of the raging bullish fundamentals. During delivery, the September might gain of the December from unwinding of positions. Stay tuned to see if this scenario plays out.