I’ve been asked a few times what my spread trade is and why I did it, so here’s a more detailed write-up:   what I did was to short the wheat pre-harvest premium in 2014.  (premium meaning May 14 was at premium to Jul 14)
And my position is just a bet that this premium would be lower by year end, or end of class.  So I’m short the May-14 contract and long the Jul-14 contract.

2 pictures here are more interesting:

1) Wheat Futures curve.gif
This shows you the wheat futures curve at 3 points in time:
a) In blue is the curve 4 months ago (before news of US drought)
b) In green is the curve at start of class in september (when drought fears were pretty high)
c) In orange is where we are now (where the drought is yesterday’s news)

You can see the curve was in contango (normal carry market) all the way back in June, and the stock out fears from the drought news drove up not just 2012 spot wheat, but also 2013 and 2014….  and i basically felt in Sep that the 2014 market prices were too pessimistic …(who knows anyway what the weather will be next week let alone 2013 or 2014)

2) Wheat May 13 vs Jul 13 (2010-2012)
This chart is interesting because it shows you the entire trading history of these two contracts (May 13 and Jul 13) going back to 2010.  You can see that in early 2011,  bad weather and stock out fears also drove 2013 pre-harvest (may-13) prices to large premium over harvest time prices (jul-13), almost 80 cents per bushel.  But this premium just slowly disappeared over the rest of 2011 as the weather behaved, and people forgot….  sounds familiar?   I see some strong parallels to what is going on right now, with the 2014 contracts…

Follow