If you decide to start trade in wheat you are trading one of the most important crops in the world, both for humans and animals. Wheat was first grown over 9000 years ago in the southwest parts of Asia, but today its produced all over the world. Since the production area is so widespread over the world, wheat is harvest at a place all year around somewhere in the world which is something you need to have in mind when you trading wheat since the seasonal variation tends to be a bit lower compared to other commodities.
The largest producers of wheat in the world is the EU, USA, Russia, Australia, Canada, and India.
The most active areas when it comes to export of wheat is Russia, the European Union and the US, hence these areas and nations are growing more wheat than they consume locally in their country.
In food wheat is often used in the shape of flower to do bread, sweats of pasta.
What affect supply and demand of wheat
When you trade in wheat it’s important to have an idea why the prices move, below we will list some events and factors that affect the price of wheat:
- The quality of the harvest
- Farming subsidies and other benefits for farmers that may force them do grow more or less wheat
- Import and export tariffs
- The price of energy, the production of wheat is quite energy consuming, so the price of fuel will affect the profitability for farmers hence also their will for growing wheat
- Substitute, if other crops change in price so might wheat do, since you can use another crop for animal feed
- Stock, what is in the storage of the last harvest?
Since the area where wheat is grown is so large and well spread over the world the price of wheat tends to be less volatile compared to other crops, hence trade in wheat might be more suitable for a trader with less experience or the one who trade in commodities with a little longer time horizon. Even though weather does not play as major role for the supply of wheat as it does for other crops it still plays a major role for the supply and there for also the demand of wheat. To understand what weather conditions which is good for the crop plays a major role in successful trading in wheat. It’s never good with too much of anything, both sun and water. Too much sun will create drought and will harm the harvest and will force the farmers to water the crop, and if they cannot afford that the crop can die and decrease the demand for wheat and force up the price. Too much water can also damage the crops especially when its harvest, since wheat need to be dry when it is harvested.
Often traders look for action and volatile prices, and the more long-time holder does not appreciate that in the same extent. So, if you want to trade in wheat you should start looking for events that you think will affect the price in wheat and maybe in binary events, maybe if a tariff is up for approval at the parliament, if a potential tariff will be approved or not may cause a good trading opportunity in wheat or just before the actual approval or disapproval and can create good opportunities when trading in wheat.
If you want to trade in wheat with a longer time horizon you should look for events that will take longer to evolve. Let’s say that you have a reason to believe that the harvest of another crop that is important for animal feed, and if the supply of that crop goes down, the price of that crop will most likely go up, and farmers may look for other alternatives to feed their animals, with wheat for example. Hence it may be a good idea to trade in wheat and allow this price effect o evolve fully and that might take a while.
Reasons to trade wheat
- Speculate on changes in demand and supply
- Inflation hedge
- Portfolio diversification
Speculation on the change of demand and supply is one of the most common reasons to trade in wheat and in the section above we went through some scenarios that might create good trading opportunities in wheat.
Inflation tend to affect prices of commodities and wheat is no exception, high inflation will often force prices to go up on a commodity hence if you have believed the inflation will go in one direction it might be a good reason to trade in wheat, both on the long and the short side.
USD, the American dollar is probably the most important currency in the world and most commodities are priced in USD. So any change in the American dollar can affect the price of wheat, a weak American dollar will decrease the price for potential buyers in other countries and create an increase in demand. So have a view or an opinion on which direction you think the USD will go can help you when you trade in wheat.
Portfolio diversification is one of the most common reason people start to trade in wheat and other commodities. Commodities tend to have low correlation compared to other asset classes which is an aspect investor strive for when they are looking for an asset class to invest or trade in.