Wheat Futures and How to Invest in Them in 2022

May 30, 2022 01:03 PM ET
Wheat Futures and How to Invest in Them in 2022

Wheat futures prices have risen by over 50% in the Chicago futures market since Russia began its invasion of Ukraine on February 24. There has been such a dramatic rise in the price of wheat futures and volatility since the war broke out that grain elevators are now refusing to accept farmer bids to sell their grain to them.

In its May Crop Production report, the US Department of Agriculture predicted that the US would produce 1,174 million bushels of winter wheat in 2022, an 8 percent decrease from 2021 and significantly below the average industry projection. With hot, dry weather on the horizon, analysts predict that greater reductions are possible. Meanwhile, the spring wheat sowing schedule was disrupted by persistent rains.

Wheat futures prices at the CBOT in 2022

Over-speculation has resulted in inflated futures prices, which have not converged with wheat cash prices by contract end. In the following section, we examine the wheat futures market in 2022 and how you can trade in them.

How the futures market works

Futures trading is the buying or selling of a futures contract on the basis of an agreed-upon price for an asset to be delivered at a future date. In a futures market, investors can purchase and sell contracts for future delivery of underlying assets. In a typical futures contract, one party promises to acquire a certain amount of securities or a commodity and deliver it at a specific date. The contract's selling party agrees to make it available.

Let’s take an instance where the December wheat contract is being purchased at $10.50 per bushel by the contract buyer when Farmer Kennedy sells it at $10.50 per bushel. Kennedy, the seller, promises to sell 5,000 bushels of wheat for $10.50 and deliver them in December; the buyer, on the other hand, has essentially locked in the price of 5,000 bushels of wheat for $10.50, and he will receive them in December.

In the futures market, participants don't all share the same goal: they don't desire to buy and sell products in the future. As speculators and futures investors, these persons aim to profit from the contract itself. Futures contracts are more valuable as the price of the asset rises, so the contract holder can sell it for a higher price in the futures market. When speculating on price swings, these traders can purchase and sell a futures contract but have no intention of delivering the actual commodity.  

How to start trading futures?

To trade wheat futures, you'll need to work with a commodities futures broker who is a member of the National Futures Association. Also, you should consult a broker professional about your trading intentions. When it comes to setting up your trading platform and learning how to check prices and place transactions, commodity brokers often offer more personalized support.

Wheat futures trading in the market

We can speculate on wheat on the stock market, which is why it is traded on both the over-the-counter (OTC) and the regulated exchanges. The two largest markets, CBOT and NYSE Euronext, both provide trading in wheat futures.  Wheat futures contracts end on March 15, May 15, July 15, September 15, and December 15 of each year. At the end of the contract month, traders have the option to either take physical delivery of the underlying commodity or roll their positions into the following contract month.

Wheat futures prices on the CBOT are listed in dollars and cents per bushel, and lots of 5000 bushels are used for transacting these contracts. The contract price for Euronext Milling Wheat futures is expressed in dollars and cents per bushel. Contracts are traded in 50-ton lots.

For Euronext Wheat futures, a metric ton represents one contract and is traded in 100-ton lots in pounds and pence. There are a variety of wheat futures contracts, as well as wheat option contracts, that allow for the purchasing and selling of wheat.

In terms of price risk management, Chicago Soft Red Winter (SRW) and KC Hard Red Winter (HRW) wheat futures contracts are the global industry benchmarks, with Chicago SRW being the world's most liquid. Wheat futures contracts typically have a contract size of 5,000 bushels.

Fundamental factors that influence wheat futures

Seasonal wheat production, like that of corn and soybeans, is susceptible to a wide range of supply and demand issues. The price of wheat is increased by increments of one-quarter of a cent. Also, the price of a single wheat contract changes by $500 for every $0.10 variation in the price of wheat.

Wheat traders can use a variety of indicators to help them predict the market's long-term trajectory. The following are the factors that have the greatest impact on the price:

  • If you're doing a technical study of wheat prices, you should focus on two things: supply and demand.

  • Weather conditions have a direct influence on the amount of wheat produced.

  • A comparison of the current stock levels with the expected supply and production levels.

  • With regard to commercial policy, this includes aid with imports or export and the degree of taxation imposed by various countries.

  • Long-term price changes for agricultural commodities such as wheat and other cereals are also influenced by the growth of the global population.

Leverage and futures market

When trading futures, you should be aware of the impacts of leverage. In order to trade a wheat futures contract, a margin deposit of between 5% and 10% of the contract's value is required. It is, therefore, possible to make 10 to 20 times as much money from a futures investment as the price movement. While you're at it, keep in mind that leveraged trading is a high-risk approach, and the profit and loss potential is increased in the same way.

In summary

Commodity futures are a derivative financial instrument that allows investors to speculate on future price movements. In order to retain their holdings, traders must deposit more margin when prices fall. Traders, on the other hand, need to be aware that wheat is a commodity that is susceptible to the fluctuations of the market. Also, a shift in how the market feels about agricultural commodities could bring a decline in price even in the absence of a specific catalyst.

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