Learn How To Trade Wheat

Why is Wheat so Important?

For centuries, wheat has been one of the most important food crops cultivated by civilizations around the world. Evidence shows that wheat production began around 10,000 B.C., and that the Egyptians produced and baked breads in ovens over 5,000 years ago.

Today wheat ranks as the second most consumed grain in the world, trailing only rice in annual consumption.

Farmers can easily grow wheat in a multitude of different climates. The crop stays fresh for a long time and has a high nutritional value. These facts ensure that wheat will remain an important food staple and a valuable commodity for the foreseeable future.

Where is Wheat Grown?

Wheat grows all over the world on every continent except Antarctica. The crop has several varieties, and climate and soil conditions determine the types grown in specific locations. In the United States, for example, wheat grows in 42 states. Hard red winter wheat grows in the Midwestern states of Kansas, Nebraska, Oklahoma and parts of Texas, while soft red winter wheat grows in the Great Lakes region and the Atlantic coast. Hard red spring wheat grows in the Northern Plains states of Wyoming, Montana, North Dakota, South Dakota and Idaho.

map showing the top 10 wheat producing countries

Global wheat production has increased steadily in recent years as emerging economies demand more food to feed their growing populations. The largest producers of wheat historically include the following countries:

Top 10 Wheat Producing Countries

RankCountryFlagAnnual Production (tons)
#1China126 million
#2IndiaFlag of India95 million
#3Russia60 million
#4USA55 million
#5France39 million
#6CanadaFlag of Canada29 million
#7Germany28 million
#8PakistanFlag of pakistan26 million
#9AustraliaFlag of Australia25 million
#10UkraineFlag of Ukraine24 million

Russia is the largest exporters of wheat followed by the European Union, United States and Canada. North Africa, Southeast Asia, Sub-Saharan Africa and the Middle East are the largest importers of wheat.

Uses of Wheat

uses of wheat

via Wikipedia

Wheat is a member of the grass family and contains several essential vitamins and minerals including B vitamins, calcium, iron and protein. As a result, food products represent the major demand component for wheat.

Wheat used for foodstuffs gets classified by its end use into five groups:

  1. High protein, premium bread making
  2. Premium bread making
  3. General purpose bread making
  4. Biscuit and cake making
  5. Animal feed

In addition to foodstuffs, wheat is used in other industries:

  • The pharmaceutical industry uses gluten in wheat to manufacture capsules.
  • The paper industry uses gluten to coat paper products.
  • The health and beauty industry use wheat germ, a part of the wheat plant rich in vitamin E, in soaps and creams. Wheat germ is also a healthy food source.

Wheat plays a small role in bioethanol production, although its use is limited compared to other crops such as corn. Wheat is also used to feed livestock.

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Wheat Price

(Price of CFD not market price)

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What Drives the Price of Wheat?

The price of wheat is usually highly correlated with the price of other grains such as corn and barley. Most of the economic and trade factors that move wheat prices affect agricultural commodities in general.

The biggest drivers of wheat prices are:

  1. The US dollar
  2. Supply/demand imbalances
  3. Emerging markets
  4. Weather
  5. Ethanol subsidies

The US dollar

The US currency is the world’s reserve currency. As a result, wheat, like other commodities, gets quoted in US dollars. Sellers of wheat receive fewer dollars for their product when the US currency is strong and more dollars when the currency is weak. Therefore, a strong US dollar depresses wheat prices, while a weak US dollar lifts them. In addition, since the United States is a major exporter of wheat, its price will likely continue to be quoted in US dollars.

Supply / demand imbalances

Governments often take actions that result in supply / demand imbalances in the wheat market. For example, in recent years India has enacted import duties on wheat in an attempt to support domestic production. These taxes could lead to depressed demand for exports and lower global prices. On the other hand, countries that subsidize wheat with tax or other incentives may cease to do so in the future. Farmers would then switch to growing other crops, which could cause wheat supplies to diminish and prices to rise.

Emerging markets

Global demographic patterns are shifting. Population growth in the developed world is stagnant or declining, but Africa, Southeast Asia and the Middle East are experiencing a population boom. As the population in these areas increase, their demand for food will also grow. Wheat is a nutritious food source that grows in a variety of different climates, so it will likely become a staple item in emerging markets. Also, as these countries grow wealthier, their consumption of meat will likely increase. Since wheat is an important source of livestock feed, this should also boost prices for the grain. Of course, if major economic or political setbacks occur in these regions, wheat prices would probably suffer.

Weather

Weather conditions plays a role in determining wheat prices. If crop yields suffer as a result of either too much rain or drought-like conditions, then prices for wheat could spike higher. On the other hand, ideal weather conditions could boost crop outputs and depress wheat prices. However, the wheat supply is global, so poor growth conditions in one region of the world are often offset by favorable conditions in another area.

Drought conditions

Droughts can have an impact on wheat prices. Via Pixabay

Ethanol subsidies

The United States government subsidizes corn farmers to help boost ethanol production.  As a result, US farmers have increased corn acreage in recent years at the expense of wheat. This has resulted in a smaller output of wheat and has probably helped boost wheat prices. The corn subsidies are politically controversial, and should they end, wheat production will probably increase and prices may head lower.

Reasons to Trade Wheat

  1. Inflation hedge
  2. Speculate on demand growth
  3. Portfolio diversification

Inflation and Weak US Dollar Hedge

Wheat is a way to bet on a weak US dollar and higher inflation. Since commodities such as wheat are priced in US dollars, the performance of the world’s largest economy plays a crucial role in its pricing. In recent years, the US Federal Reserve Banks has supported easy monetary policies that have kept the US dollar weak. US policymakers need this weakness to bolster US exports and support consumer borrowing and spending. A continuation of these policies could spur inflation and will very likely help wheat prices.

Speculate on Demand Growth

Wheat has many favorable properties that could support continued global demand growth. It’s a hearty crop that’s easy to grow. Unlike rice, it doesn’t require much water or labor. This could make wheat the grain of choice in developing economies across the world. Wheat also competes for acreage with corn. If trends in biofuel production continue, there could be a shortfall in wheat supply and higher prices.

Portfolio Diversification

Most traders have the vast majority of their assets in stocks and bonds. Commodities such as wheat provide traders with a way to diversify their portfolios.

Should I Start Wheat Trading?

Traders that are bullish on emerging market economies might consider trading wheat. As these economies grow, they will require affordable crops that grow easily and can be used to produce a variety of different foods. Also, as consumption of meat grows in emerging markets, demand for wheat as a source of animal feed will climb as well.

However, fiscal hawkishness by the Federal Reserve accompanied by strength in the US dollar could depress commodity prices including wheat. Also, a reduction in biofuel demand could lead farmers to allocate more acreage to wheat and cause prices to fall. Finally, traders should understand that wheat is a commodity that is subject to the whims of the marketplace. A change in market sentiment toward agricultural commodities could send prices lower without a specific catalyst.

Expert Opinions on Wheat

wheat experts

Jim Rogers, who co-founded the Quantum Fund and created the Rogers International Commodity Index, sees agriculture as the commodities sector with the best potential. Rogers sees wheat as one of many agricultural commodities that should be watched closely in the coming years.

Jim Rogers appears on Yahoo finance

Jim Rogers via Yahoo Finance on Agricultural Commodities

Robert Chesler, vice president of the foods group at Chicago-based INTL FCStone, agrees with this opinion. Chessler sees agricultural commodities in general attracting more money from traders. He cites the relatively low prices in this sector as the catalyst.

However, it is worth noting that some experts see China’s growing stockpile of grains as a possible overhang on the market.

How to Trade Wheat

Wheat traders have several ways to invest in the commodity:

Method of InvestingComplexity Rating (1 = easy, 5 = hard)Storage CostsSecurity CostsExpiration DateManagement CostLeverageRegulated
CFDs3NONONONOYESYES
Shares2NONONONOYESYES
ETFs2YES*YESNOYESNOYES
Futures5NONOYESNOYESYES
Options5NONOYESNOYESYES

*Storage costs are passed on to traders in the form of management fees.

Wheat CFDs

One way to invest in wheat is through the use of a contract for difference (CFD) derivative instrument. CFDs allow traders to speculate on wheat prices without purchasing ETFs, futures, options or agribusiness shares. The value of a CFD is the difference between the price of wheat at the time of purchase and the current price. CFD traders, therefore, have direct economic exposure to wheat prices.

Many regulated brokers worldwide offer CFDs on grains including wheat. Customers deposit funds with the broker, which serve as margin. The advantage of CFDs is that trader can have exposure to wheat prices without having to manage complicated futures or options positions.

Start Trading Wheat

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One of the leading brokers for trading agricultural commodities, like wheat, is Plus 500. Here’s why:

  • No Commission on trades (other charges may apply)
  • Free demo account
  • Easy to use (mobile-friendly) platform
  • Industry-leading risk management tools
  • Trade wheat and hundreds of other markets
  • Your funds are safe – publicly listed company regulated by the UK’s Financial Conduct Authority and Cyprus’ Securities and Exchange Commission

Start Trading at Plus500.com Important: Your capital is at risk. CFD services are suitable for experienced traders only.

Shares of Wheat Companies

Gaining direct exposure to wheat through shares of companies is difficult. There are no public companies that are pure-play wheat producers. However, traders can purchase shares of agribusiness companies such as Archer Daniels Midland Company and Bunge Ltd that give them some limited exposure to wheat prices.

Both Archer Daniels Midland Company and Bunge Ltd. have diversified international businesses that span numerous products and industries. Although not pure wheat plays, these companies generally benefit from higher agricultural prices.

The list is intended for information purposes only and inclusion here does not constitute investment advice.

 Current PriceOverviewListingsFoundedNumber of EmployeesInteresting Fact

Archer Daniels Midland
US food processing and agricultural commodities trading companyNew York (NYSE)190232,000+Fortune magazine named ADM the World's most-admired food production company 2009-2011

Bunge
Global agribusiness and food company incorporated in BermudaNew York (NYSE)181832,000The world's number one seller of bottled vegetable oil to consumers

Wheat ETFs

These financial instruments trade as shares on exchanges in the same way that stocks do. There is currently only one pure-play wheat exchange-traded fund (ETF), the Teucrium Wheat Fund. However, there are several ETFs that invest generally in the agricultural sector including the following:

Teucrium Wheat FundPowerShares DB Agriculture FundiPath Bloomberg Grains SubTR ETNiPath Bloomberg Agriculture Subindex Total Return ETN

Wheat Futures

The Chicago Board of Trade (CBOT), a subsidiary of the Chicago Mercantile Exchange (CME), offers a wheat futures contract that represents 5,000 bushels or about 136 metric tons.

The contract also trades during and after regular market hours on the CME Globex exchange. Futures are a derivative instrument through which traders make leveraged bets on commodity prices. If prices decline, traders must deposit additional margin in order to maintain their positions. Wheat futures contracts expire on the 15th day of March, May, July, September and December. At expiration, traders must either accept physical delivery of the commodity or roll their positions forward to the next trading month.

Futures trading requires a high level of sophistication since factors such as storage costs and interest rates affect pricing.

Wheat Options

The CBOT offers an options contract on wheat futures. Options, also a derivative instrument, employ leverage to trade commodities.

As with futures, options have an expiration date. However, options also have a strike price, which is the price above which the option finishes in the money. Options buyers pay a price known as a premium to purchase contracts. An options bet succeeds only if the price of wheat futures rises above the strike price by an amount greater than the premium paid for the contract.

Therefore, options traders must make correct determinations about the size and timing of a move in wheat futures in order to profit from their trades.

Further Reading

Lawrence Pines is a Princeton University graduate with more than 25 years of experience as an equity and foreign exchange options trader for multinational banks and proprietary trading groups. Mr. Pines has traded on the NYSE, CBOE and Pacific Stock Exchange. In 2011, Mr. Pines started his own consulting firm through which he advises law firms and investment professionals on issues related to trading, and derivatives. Lawrence has served as an expert witness in a number of high profile trials in US Federal and international courts.
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