General presentation of wheat:
First, let's take a moment to make sure you have the knowledge you need about the wheat market to understand the major issues and opportunities for growth.
Wheat is currently the second most consumed cereal in the world, with rice still being the first. And the wheat market is particularly important because it has multiple uses. Indeed, if wheat is mainly used for human consumption with nearly 600 to 700 million tons consumed per year, it is also used for other purposes.
In fact, human consumption represents 58% of the demand and corresponds to the agri-food sectors with a main use in the manufacture of bread and pasta. Next comes animal consumption with 34% of the demand where it is used for cattle feed, mainly in developing countries. Finally, 8% of wheat is also used by industry, particularly in the manufacture of cosmetics and in the dietetics sector.
As far as wheat production in the world is concerned, the European Union is the largest producer in the world, with France in fourth place. Then comes China which produces 19% of the world wheat, India, the United States, Russia and Canada.
As we will see below, wheat is traded on the over-the-counter market and between co-contractors. But it is also traded on some regulated markets. The largest volumes of wheat are traded on the CBOT or Chicago Board of Trade which was absorbed by the CME or Chicago Mercantile Exchange in 2008.
Information to know about wheat trading on the stock market:
As mentioned above, wheat trading is over-the-counter and on the CBOT and CME futures markets.
There are also very active futures and options exchanges, in contracts of 5,000 bushels (one bushel corresponds to 27.2 kg) on the CBOT, but also on the Kansas City Board of Trade (KCBT), the Minneapolis Grain Exchange (MGE) and the Winnipeg Commodity Exchange (WCE) in Canada, or on the London International Financial Futures and Options Exchange (LIFFE), which is part of the American-European platform NYSE-Euronext, as well as on the Buenos Aires Stock Exchange.
Internationally, the reference wheat is called "soft red winter" and is quoted on the CBOT market. However, it is important to understand that this quotation nowadays represents the reality of the domestic price in effect on the American market as well as a trend indicator. As we have seen above, there are several factors likely to influence the price of wheat through an influence on supply and demand with, in particular, a strong climatic dependence such as the level of stocks or the commercial policies of the States with export and import subsidies.
Quotes for the wheat price:
Wheat on the stock market, that is wheat on which we can speculate, is exchanged on the OTC market as well as regulated markets. The major markets that trade in wheat are the CBOT (Chicago Board of Trade) and the related CME (Chicago Mercantile Exchange).
The contracts enabling the buying and selling of wheat worldwide are the futures contracts although they can also take the form of options.
The indicators to follow for wheat trading:
Several indicators may assist wheat traders to determine the market direction of the trend over the medium to long term. The elements that most influence the price are as follows:
- The supply and demand are of course the factors to be favoured in your technical analysis of the wheat price.
- The climatic conditions that directly determine the production level.
- The stock levels, to be compared to the supply and production figures.
- The commercial policies of the various countries such as assistance with the import or export and the level of taxes implemented.
- Finally, the development of the world population constitutes a secondary strong factor that influences the price of agricultural commodities such as wheat and other cereals over the long term.
Historical evolution of the price of wheat :
Historically, the price of wheat has experienced many successive fluctuations. Thus, we could observe a continuous rise in the price of wheat between 2002 and 2008 and in particular a very important explosion between 2007 and 2008 with a price of the bushel which climbed of 190% on this period with the reaching of a record at 13.18$.
This increase was due to several factors, including a continuous rise in world demand, a drop in stocks and unfavourable climatic conditions for production, including several years of drought.
Since this increase, the price of wheat has experienced a strong downward correction, starting in 2008 with a price of $4.72 per bushel. A slight recovery then took shape in 2009 around $5 per bushel.
In 2012, the price reached a new peak of $9.06 before gradually falling back to a low of $3.67 in 2016.
Since then, we have seen a bullish recovery that has allowed the price of wheat to reach $6.76 in early 2021.
How to invest in wheat on the stock market?
There are several ways to invest in wheat on the stock market, including ETFs (Exchange Traded Funds), shares or CFDs (Contracts for Difference). Here is an overview of each of these methods:
- Investing in wheat with ETFs: ETFs are exchange-traded funds that track the price of wheat. Wheat ETFs allow investors to benefit from the performance of the wheat market without having to physically own the underlying asset. Wheat ETFs are available on exchanges around the world, offering investors a wide range of options to diversify their portfolio.
- Investing in wheat with equities: Investors can also invest in the wheat stock market by buying shares in companies related to the agriculture and food sector, such as food processors, food distributors and agricultural logistics companies. However, it is important to note that the performance of these stocks can be influenced by factors other than the performance of the wheat market, such as economic conditions, competition and political events.
- Investing in wheat with CFDs: CFDs are derivative financial instruments that allow investors to speculate on changes in the price of wheat without having to physically own the underlying asset. Wheat CFDs are offered by regulated online brokers and are available on online trading platforms. Wheat CFDs also allow for leveraged trading, which means you can control larger positions with less initial capital. However, it is important to note that leverage can also increase potential losses.
In conclusion, investing in wheat on the stock market can be done via ETFs, stocks or CFDs. Each of these methods has advantages and disadvantages, and it is important to understand the risks and benefits of each method before making an investment decision. It is recommended that you consult an investment advisor or commodity market expert before making any investment decision.