When Life Gives You Wheat... You Make Bread
Dan Hussey of Zaner Financial Services - InsideFutures.com - Mon Apr 15, 10:10AM CDT
There is an interesting and rather profound dynamic at work in the US wheat complex that has inter-wheat spreads (Kansas City, Chicago, and Minneapolis varieties) turned a bit on their heads. With higher quality / protein varieties at a discount in price to the larger (more liquidity) Chicago contract. This could be attributed directly to the higher commercial storage rate set at the exchange (and used in cost of carry calculations by spread traders) which is dictated by the VSR (variable storage rate). With KC wheat costing conceivable more to store, a natural arbitrage will occur between the two contracts, as some traders will seek the lower cost of carry the Chicago contract provides. In a market where prices are not improving, reducing the cost to carry the commodity is one of the most direct ways to improve your bottom line. Add on the fact that the KC contract is deliverable against the Chicago (and not the other way around), and there are now two methods for this arbitrage to occur.
The wild card in this equation is the VSR for wheat (Chicago and Kansas City) as set by the exchange. This storage rate shifts relative to where spreads are trading to their calculated market carry, and this shift can sometimes forecast what future contracts may be considering...

Dan's full "Spread Outlook" is available for download, including an indepth look into the most liquid spreads and market conditions that might present opportunities for spreading! Complete with charts and cost of carry calculations!