The Basics of Trading Wheat Online

Wheat is one of the most popular agricultural commodities as it remains a vital component in staple foods worldwide.

Wheat is still one of the most consumed grains worldwide – and with good reason. Its high levels of protein and general nutritional value make it a staple foodstuff. From a volume perspective, wheat is one of the most actively produced food commodities because of its flexibility to thrive and grow in many agricultural climates and environments.

Why should you be investing in wheat?

Wheat investors often take a long-term view on this commodity. That’s because the world needs to eat and avoid famines, regardless of whatever is happening around the globe and key foodstuffs like wheat are integral to keeping the global population fed.

However, demands on wheat production have risen considerably in recent decades. With the global population continuing to soar, wheat consumption is unsurprisingly surging. When we talk about wheat consumption, we’re not just talking about people. With meat consumption growing in some emerging markets – despite the move towards more sustainable, vegan diets in the developed world – farmers are leaning heavily towards wheat for animal feed.

When you combine those factors, it’s easy to see why wheat is set to remain a valuable agricultural commodity for decades to come.

There are six varieties of wheat

Each class thrives in certain environments and soils and helps to contribute to the year-round production of wheat worldwide.

Hard Red Winter

This wheat is one of the most versatile options, making it the ideal candidate for use with baking whole grain and whole wheat bread, rolls, flat breads and Asian-style noodles. It is also commonly used to make general purpose flour and a host of staple cereals. The hard red winter wheat is usually grown in the autumn months, ready for harvesting in the subsequent spring.

Hard Red Spring

The hard red spring variety of wheat is grown throughout the spring months and harvested in the autumn – the opposite of the hard red winter variety. This wheat contains a higher content of gluten than its siblings, which results in a popular combination of texture and elasticity that makes it tailor-made for pastries and pizza doughs.

Soft Red Winter

The soft version of the red winter wheat grain, unsurprisingly, features a softer texture. This makes it easier and faster to mill, whilst keeping all the flavour that one expects from the hard red winter variety. The softer blend of this variety makes it popular for baking cakes, cookies, crackers and much more.

Soft White

This variety can generally be grown all year round, which is why it’s not given a seasonal tag. It is the most popular wheat grain used for on-the-go snacks, yeast breads and crumblier pastries. The soft white grain has reduced moisture content and its high extraction rates mean that this particular wheat is whiter than its siblings.

Hard White

The hard white wheat grain is mostly used to produce low-cost staples such as tortillas, noodles and pan breads. It benefits from a more subtle flavour than its hard red wheat counterpart, with somewhat sweeter notes too. This grain is often milled whole, with the sole aim of maintaining its protein and nutrients.

Durum

Considered the most durable of all six wheat classes, durum wheat is the core ingredient of fresh pasta, semolina and a host of Mediterranean and Middle Eastern flatbreads. Durum wheat also produces bulgur, which is derived from its cracked and parboiled wheat berries.

Recent price history of wheat

In the last decade, the price of wheat has fluctuated considerably.

In February 2010, it was available at a shade over £90 per tonne before rising to highs of £222 in late November 2012. The prices surged per tonne following a poor harvest in Russia, while drought also hampered production in the US significantly.

In early 2020, the price of wheat per tonne spiked following Australia’s poor yield during its 2019/20 trading year. The price has steadily risen ever since following the onset of the Covid-19 pandemic to £280+ per tonne. In early 2022, the price of wheat per tonne soared due to the Russia-Ukraine war – both of which are dubbed the “bread basket of the world”. Logistical and supply chain issues in and out of Ukraine have seen wheat prices reach £382 per tonne in April 2022 – the highest price in the last 20 years.

Where can you trade wheat?

You can trade wheat futures on one of the two main stock exchanges, including The Chicago Board of Trade (CBOT) and the NYSE Euronext. Both allow you to trade wheat futures, with rates quoted in USD per bushel. A bushel is an imperial unit of volume equivalent to eight dry gallons of wheat.

It’s also possible for you to trade wheat via contract for difference (CFD) via brokers online, which don’t require you to own the underlying asset.

Five ways to gain exposure to wheat prices

There are multiple ways for you to gain exposure to the wheat market and most don’t even require you to directly own or store the wheat itself.

Wheat stocks

You may also want to consider investing in shares of companies involved in the wheat industry. There aren’t any public companies that focus solely on the production of wheat. However, multiple agribusiness stocks can give you modest exposure to wheat prices, as well as several other soft commodities. While investing in single company stocks may be more accessible, you may have more exposure to risk unless your portfolio is diversified.

Two companies on the New York Stock Exchange (NYSE) that are influenced by higher wheat prices are Archer Daniels Midland (ADM) and Bunge Ltd (BG). These global food processing and agricultural commodities firms may be exposed to wheat prices, even though they have more recently diversified into other products and industries globally. In February, Bunge Ltd confirmed a quarterly dividend of $0.525 per share to shareholders, with dozens of hedge funds said to be bullish on this firm of late.

Wheat ETFs

If you’d like to diversify your investment in the wheat industry across multiple equities, you may wish to consider investing in one of several exchange-traded funds (ETFs). This allows you to own a range of stocks under one instrument, reducing your possible exposure to risk.

The Teucrium Wheat Fund is the only ETF focusing sole on publicly listed wheat producers. This is a ‘long-only’ ETF, which means you can only profit on this wheat ETF if the price moves up rather than down. However, several other ETFs focus on other agricultural commodities as well as wheat. These include:

Invesco DB Agriculture Fund

iPath Bloomberg Agriculture Subindex Total Return ETN

Wheat CFDs

If you don’t want to worry about the prospect of owning the underlying asset, i.e. storing bushels of wheat, you could consider trading solely on the fluctuations of the price of wheat. Wheat CFDs allow you to go long (buy) or short (sell) on the current market price of wheat.

If you believe the price of wheat will rise, you could take a long position. If you believe the price of wheat will fall soon, you could take a short position. The profit or loss of a wheat CFD is the difference between the price at the time you enter and the price at the time of closing your position. This type of trading may not be appropriate for new traders, at least initially.

If you’re a time-poor retail trader, wheat CFDs are the ideal instrument as you may not have the time – or the inclination – to manage and monitor complex futures or options positions.

Wheat futures

Wheat futures contracts are one of the most popular entries into the wheat market.

The Chicago Board of Trade (CBOT), a subsidiary of the Chicago Mercantile Exchange (CME), sell wheat futures contracts per 5,000 bushels. This represents approximately 136 metric tonnes of wheat. You can trade wheat futures contracts during and beyond traditional market hours via the CME Globex exchange.

Futures trading is a form of derivatives trading, just like contracts for difference (CFD) trading. When you take a wheat future contract out, it is often a leveraged position, which means you can take a 5:1 position on the future price of wheat. For example, you would only need to make a 20% deposit into your trading account to get five times the market exposure. If you deposited £1,000, your open position would actually be worth £5,000.

The simplest definition of futures trading is that it is an agreement between a buyer and a seller to deliver or receive said commodity at a specified price at a specific date in the future. Compared to other types of trading, this can be considered complex.

Wheat futures contracts typically expire on the 15th day of key trading months – usually March, May, July, September and December. At the expiry of these contracts, you’ll need to either take physical delivery of the wheat or roll your open position forward to the subsequent month. Some contracts also allow you to settle with cash instead of taking or making the delivery of the said commodity.

Wheat options

The CBOT also offers options contracts on wheat, too. Options have similarities and subtle differences to wheat futures. They both have expiry dates written into their contracts. However, wheat options also include a ‘strike price’. An options trade on wheat is only profitable if the price of wheat futures moves beyond the strike price by a figure greater than the premium paid to enter the contract.

Options traders of wheat and all kinds of agricultural commodities must make sensible calculations in timing their options to achieve the moves in wheat futures prices to generate profits.

What influences the price of wheat?

The price of wheat typically correlates with other agricultural commodities like corn and barley. In fact, geopolitical issues that influence the price of wheat affect all other ‘soft’ commodities. Soft commodities are those grown agriculturally. They’re at the other end of the spectrum to hard commodities that are mined instead. Other popular soft commodities to trade include soybean, coffee and sugar.

Political instability is a primary driver of wheat prices, with the ongoing crisis in Ukraine currently affecting the supply of wheat to the rest of the world. Naturally, as demand exceeds supply, wheat prices begin to surge.

Other external factors that can impact the price of wheat include the rise and fall of foreign currency exchange rates, which can make imports or exports more or less competitive for consumers and producers alike. Changes to trade regulations can also influence a nation’s wheat output. Weather also plays a key role, with natural disasters such as floods or droughts capable of destroying a country’s wheat yield.

Unlike some other soft commodities like soybeans and corn, wheat is a human crop. As it has a human value, this results in wheat having a very different market dynamic than corn and soybeans, which are invariably used as animal feed.

To diversify your portfolio from just equities and bonds, agricultural commodities like wheat can be a useful addition.