How to invest in wheat?

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Gold and oil are not the only commodities you can invest in online and some agricultural commodities also attract many investors. This is the case of wheat, for example, which we will talk about here with some useful information about its quotation, production and use, in order to help you make relevant analyses and anticipate its future variations.  

Analysis N°1

First of all, we will of course follow the weather and climate conditions in relation to the producing countries. Indeed, the vagaries of the climate will have a strong influence on the level of production. Bad weather conditions can indeed slow down the wheat supply and vice versa.

Analysis N°2

Stock levels will also be closely monitored. Indeed, the rise or fall of wheat stocks is above all due to the evolution of demand and supply. When wheat production is high or demand is low, stocks increase and conversely when production is low or demand is high.

Analysis N°3

Another interesting fact to follow is that world demographics will have a direct influence on wheat demand. Indeed, let's remember that the main uses of this cereal are for human and animal food. An increase in the world population will automatically lead to an increase in demand. However, this evolution factor must be analyzed in the long term because the impact of a demographic evolution is not immediate.

Analysis N°4

We should also follow with interest the agri-food sector and its evolution. Indeed, when sales in this sector are high, this implies a strong demand for wheat, whereas low sales tend to indicate a weak demand.

Analysis N°5

Finally, it will also be necessary to focus on developing countries which tend to accelerate the world demand for wheat due to the strong migration of their populations from the cities to the countryside and the increase in income and standard of living which will also increase consumption and therefore demand.

Analysis N°6

Of course, a technical analysis of the wheat price based on stock market charts will also be essential.

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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:

 

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.

Frequently Asked Questions

By whom and how is the price of wheat set?

Since August 15, 1936, when the law was passed to create the ONIB or Office national interprofessionnel du blé (National Interprofessional Wheat Office) whose mission is to set the price of wheat for millers, this organization has had a monopoly in France for the import and export of wheat and its derivatives. But the price of wheat on the stock exchange is determined by market supply and demand and therefore varies according to these elements and according to international exchanges.

Why is supply the main driver of wheat prices on the exchange?

By analysing the historical graphs for wheat, we can see that the major increases in the price of this commodity are often correlated to changes in supply and, in particular, to the climatic conditions and the arbitrations of the cereal producers which have influenced it. Supply therefore seems to have a greater impact than demand on the evolution of the price of this commodity.

Where and how to invest in wheat on the stock market?

To invest in wheat on the stock market, it is of course not a question of physically buying this commodity but rather of using specific contracts and in particular derivative products such as CFDs to speculate on its price. These contracts are available online via the trading platforms of certain brokers and allow you to bet on the rise and fall of this value.

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