Wheat – Commodity

Instrument description

One of the staple food crops that is grown and cultivated all around the world is wheat. Since ancient times till today, wheat is considered a popular food source that fulfills the dietary needs. Today, wheat is the most consumed food source and right behind rice in global consumption. Wheat is not only an essential staple food source but also a valuable commodity.

Wheat belongs from the grass family and contains healthy protein, minerals, vitamins, iron, and calcium that the body needs to function properly and prevent illness and reduce risk of chronic diseases. The major demand of wheat comes from the food sources. The global wheat production has increased due to growing population and emerging economies. The top five countries that lead in wheat production (in tons) are

1. China - 126 million
2. India - 95 million
3. Russia - 60 million
4. USA - 55 million
5. France - 39 million

Wheat is grown in large quantities and use for in the consumption of local population and also for export. Both China and India produce the most amount of wheat, but both the countries have large population, which requires wheat and other crops to fulfill the food needs. Russia is the largest exporter of wheat, and then it is the European Union (E.U), USA, and Canada. Wheat is used in

• Making high protein bread
• Simple and premium bread
• Biscuit and cake making
• Livestock and animal feed
• The gluten in wheat is used to make medicine capsule
• The gluten is also used in the paper industry
• A wheat plant called wheat germ contains Vitamin E that is used in making soaps and creams

History of Wheat

Historians suggest that the wheat was produced in 10000 B.C, and later the Egyptians grew and used wheat to bake bread over 5000 years ago. Wheat can be grown at different temperatures. Wheat usually retains its nutritional value for longer periods and also remains fresh for a long time as compared to other agricultural crops.

Wheat is also one of the few crops that is grown in almost every part of the world except Antarctica. Wheat has many types, which makes the crop easily cultivable in nearly different types of climates and soil. The soil type and climatic conditions determine the variety of wheat that is grown. For instance, in the USA, wheat is grown in almost 42 states.

• The hard red spring wheat is grown in North and South Dakota, Montana, Wyoming, and Idaho.
• The hard red winter wheat is grown in the Midwest that includes Nebraska, Kansas, Oklahoma, and some parts of Texas.
• The soft red winter wheat is grown along the Atlantic coast and areas around the Great Lakes.

Supply and Demand of Wheat

Wheat is probably the only crop in the soft commodities that is grown in variety of soil and different weather conditions. As wheat is grown in most countries, there is a constant supply of wheat that not only fulfills the domestic demand but is also exported. But a change in government policy on imports can lead to a decrease in the global supply of wheat and increase its price.

How to read the price change of Wheat

Wheat is a global commodity that is commonly traded on Chicago Mercantile Exchange (CME), Chicago Board of Trade (CBOT), and NYSE Euronext (Euronext). Wheat is traded 24 hours and 6 days a week on the CME Globex, which is a global electronic trading platform. The symbol of wheat on the CME Globex is ‘ZW,’ the price quotation is in USD per pounds, and the minimum contract unit is 100 Bushels. The trading hours are 00:00-12:44 and 13:30-18:19 (GMT). The Future contract expiration months are March, May, July, September, and December. The wheat prices are quoted in USD and Cents per Bushel. The short form of bushels is BU.

When we analyze the wheat price chart, we see the wheat prices trading from $480 to $580 per bushels from the second week of September 2019 to the end of January 2020. The highest value of wheat in recent months was $580.150/BU on January 21, 2020. There is a constant fluctuation of wheat prices as the price falls and then suddenly rises. The lowest wheat price was the recent $475.488/BU on June 26, 2020. The wheat prices steadily rise and we begin to notice Bullish trends from the start of July 2020, and currently, the price of wheat is $535.35/BU. The Bid price is $534.75/BU while the Ask price is $534/BU

How to Trade Wheat

Wheat is categorized as a volatile market with sudden and large price fluctuation that traders can benefit from by correctly speculating the price movements. You can diversify your portfolio by investing in wheat, but you can add other commodities such as crude oil, platinum, gold, coffee, or corn to lower the risk of financial loss and prevent volatility of any one commodity.

The common ways to trade wheat are Futures Contracts, Options, Contract for Difference (CFD), Exchange Traded Funds (ETFs), and Shares. The Futures contract of 5000 bushels or 13 metric tons of wheat is offered on CME. The Futures contract is traded on the CME Globex index during active hours and also after regular market hours. You make bets using leverage on the price of wheat by using Futures. The contract expires with the physical delivery of wheat on the 15th of March, May, July, September, and December. Trading Futures is quite tricky, and you have to consider the interest rates and storage costs.

one of the most popular way to trade wheat is by using CFD, which allows you to speculate the price difference of wheat from the opening to closing of the trade. with a leverage of 1:10 if you wish to trade $1000 worth of wheat, then you must deposit $100 to the CFD provider. As you are speculating on the underlying asset, you do not have to buy or store wheat. With CFDs, you can profit from both the Bullish and Bearish trends if your prediction is correct. With CFDs, you can profit, but there can be considerable losses if the market goes to the opposite direction, so a risk management strategy can be used while trading.

There are no publicly traded companies that produce wheat, so it is difficult to directly invest in the wheat stock market. However, you can invest in shares of companies that do agribusinesses such as Archer Daniels Midland Company and Bunge. Ltd.

What causes the price change of Wheat?

The price of wheat is directly related to the price of other grain products such as barley and corn. The economic factors that decide and move the wheat prices are

• Supply and Demand Imbalance

As wheat is consumed domestically to fulfill the energy demands, many governments may put import duty to allow wheat to be used within the country. The duties and tariffs can lead to lower wheat exports and affect wheat prices. Farmers also get subsidies on planting wheat and other crops such as sugarcane and soybeans. If the subsidies are stopped, then farmers can look to grow other valuable crops to get profit, which could cause a decline in wheat supplies and a rise in wheat prices.

• Weather

The weather patterns play a crucial role in determining the prices of every crop. If there are longer drought periods or excessive rains, then the prices of wheat will rise. On the other hand, favorable weather conditions can lead to sufficient wheat supply and a decrease in wheat prices. But as wheat is produced globally so the unfavorable condition in one region may be balanced out by favorable conditions in other regions where wheat is grown.

• Emerging Markets

The population of the world is growing at a steady pace, but there have been population booms in many countries of Asia and Africa. As the population increases, so does the need for food for the growing population. Wheat is already a staple food source that has significant nutritional value and wheat is also used as livestock feed, so demand of wheat will further rise, and so will the its prices.

• Ethanol subsidies

Since many years, the U.S government has given subsidies to farmers to grow corn, which can help to increase ethanol production. The farmers avail the opportunity and grow corn at the expense of wheat, which results in a limited supply of wheat but increases the prices of wheat. If the subsidies are stopped, then the wheat production may increase and lower the wheat prices.

• U.S Dollar

Wheat, like every other commodity, is quoted in U.S Dollars, and it is an inverse relationship. When the value of U.S Dollar appreciates, then wheat prices fall, and when the U.S Dollar depreciates, then the wheat prices rise. The sellers and distributors of wheat get few USD when the currency is strong and get profit when the USD is weak.

The advancements in agricultural technologies can increase the supply of wheat and lead to a decline or stable prices of wheat. The prices of other soft commodities such as corn and rice also influence the prices of wheat. The traders and investors need to consider the political news and events, weather forecasts, and seasonal consumption when trading wheat.

The information above is for education purposes only and cannot be considered as investment advice. Past performance is not reliable indicator of future results.