Wheat is a cereal grain derived from the seed of the grass, Triticum spp. It is a staple food all over the world and has been cultivated since 9600 BC. In fact, evidence indicates that the ancient Egyptians produced wheat and baked bread.

Wheat futures track the price of wheat and trade on the CME. Wheat futures are great for traders who wish to get access to the wheat market in an easy way, yet at an affordable price.

At an annual production of more than 730million metric tonnes as of 2017, wheat is the second most-produced grain after corn. It is also the second most-consumed grain after rice. Thus, it is a very important commodity in the global market. In the commodity market, wheat futures contracts are categorized, according to the grain properties, into specific classes — hard red winter, hard red spring, soft red winter, durum, and white wheat.

Wheat Futures Contract Specifications
Symbol
W
Exchange
CME
Tick Size (Minimum Price Fluctuation)
$12.5
Point Value
$50
Contract Size
5,000 bushels, which is 136 Metric Tons
Contract Months
March (H), May (K), July (N), September (U) & December (Z)
Trading Hours
Sunday – Friday 7:00 p.m. – 7:45 a.m. CT and Monday – Friday 8:30 a.m. – 1:20 p.m. CT
Settlement
Deliverable
Grade
#2 Soft Red Winter at contract price, #1 Soft Red Winter at a 3 cent premium, other deliverable grades listed in Rule 14104.
Last Trade Day
The business day before the 15th calendar day of the contract month.
Last Delivery Date
Second business day after last trading day of the delivery month.

Uses of Wheat

Wheat is used for quite a number of things, but food production represents the main use:

Human food: Wheat is rich in many nutrients, including the essential vitamins, such as the B vitamins and minerals, such as iron and calcium. With a 13 percent protein content, wheat has more protein than any other major cereal. It, therefore, makes sense that the major use for wheat is in food production.

Pharmaceuticals: The gluten in wheat is used by the pharmaceutical industry to produce capsules.

Cosmetics: Wheat germ is very rich in vitamin E, so in the cosmetic industries, it is used to produce skin creams, body lotions, and bathing soaps.

Paper industry: Gluten is used in paper production to coat paper products.

Livestock feed: Wheat is used in making animal feed

Biofuels: Sometimes, wheat is used in producing bioethanol, which is a major ingredient in gasoline, but the role of wheat in ethanol production cannot be compared to that of corn.

The Largest Producers and Consumers of Wheat

Wheat is grown in different parts of the world. The top producers include China, India, Russia, the United States, France, Canada, Germany, Pakistan, Australia, and Ukraine. Most of these countries consume what they produce, so the top producers are not necessarily the top exporters. Russia tops the export table, followed by the European Union, the US, Canada, and Australia.

In terms of wheat consumption, China tops the list, followed by the EU-27, India, Russia, the United States, Pakistan, Egypt, Turkey, Iran, Brazil, and Algeria. The regions that import the most wheat are North Africa, Southeast Asia, Sub-Saharan Africa, and the Middle East. Trades are mostly carried out through futures contracts.

Wheat Futures Trading Strategies

Wheat futures Trading Strategy

Wheat futures Trading Strategy

The wheat futures market is easily accessible for retail traders, and provides some great profit opportunities. We ourselves have wheat trading strategies in our portfolios, and they provide nice diversification in times when other markets are choppy and unstable. In fact, the trading strategy above is one of our wheat trading strategies that we’re algo trading right at the moment!

If you are interested in edges for agricultural futures, then check out our edge membership, where you’ll get a new edge sent right to your inbox each month!

Why Trade Wheat Futures Contracts? 

Wheat Futures Trading

Wheat Futures Trading

Trading agricultural commodity futures contracts can be very profitable if you know what you are doing and why you are doing it. There are many reasons to choose to trade wheat futures contracts, and these are some of them:

Diversifying your portfolio: If you have been playing in the financial market for a reasonably long time, you will know that it is very risky to invest in one asset class, such as stocks or bonds. Commodities like wheat offer you the chance to spread your investments across different asset classes, thereby reducing some systemic risk.

Hedge against inflation: Paper currencies, such as the U.S. dollar, are backed by the government, and their values are often at the mercy of the government’s monetary policies. Since wheat is a commodity with a tangible value, its prices increase when the value of the U.S. dollar depreciates due to rising inflation.

Betting on the growing demand for wheat: As the global population increases, the need for food commodities such as wheat increases, pushing up the demand for the commodity. Apart from the demand from human consumption, wheat is increasingly being used for the production of bioethanol because of the need for renewable energy. So, it is possible that wheat demand will exceed the supply and push prices up.

Wheat Seasonality

Here is a chart showing the seasonal tendencies of the wheat futures market. 

source

How to Play the Wheat Futures Market

The best approach to playing the wheat commodity market is to trade the futures contracts. Wheat contracts trade on the Tokyo Grain Exchange, Euronext, and the Chicago Board of Trade (CBOT), which is a member of the Chicago Mercantile Exchange (CME) Group.

A wheat futures contract on the CBOT is equivalent to 5,000 bushels or about 136 metric tons, and it normally expires on the 15th day of the months of March, May, July, September, and December. Settlement, at expiration, is by physical delivery of the commodity. Traders who do not want to make or take delivery of the commodity can roll over their positions to the next expiration month.

Through the CME Globex electronic trading platform, the contract can be traded from anywhere, both during and after regular market hours. Futures contracts are leveraged instruments — you only deposit the required margin to carry the full contract.

Comparing wheat futures contracts with other methods of trading wheat

Basis Wheat Futures Wheat Options Wheat ETFs Wheat CFDs
What it is
Agreement to exchange the asset at expiration
A right to buy or sell the asset on or before the expiration
Instruments that tracks the price of wheat but trades like stocks
Contract to exchange the difference in the price of the asset, from the time the trade is entered to the time it is closed
Where it trades
Commodity futures exchanges
Commodity exchanges
Stock exchanges
Online CFD brokers
Availability of leverage
Yes
Yes
Only with a margins brokerage account
Yes
Extra management cost
No
No
Yes
No
Expiration
Yes
Yes
No
No

Factors That Can Affect Wheat Prices

Factors that Affect the Wheat Futures Market

 Factors that Affect the Wheat Futures Market

There are so many factors that can affect the prices of wheat futures contracts, so as a wheat trader, you need to watch out for them. They include the following:

Weather Events: Weather conditions can play a role in wheat production and pricing. Adverse weather conditions, such as drought or too much rain, may reduce production and increase wheat prices, while ideal weather conditions can boost yield and force prices down.

The value of the U.S. dollar: Just like other commodities, wheat futures contracts are quoted in U.S. dollars, so when the currency is weak, wheat prices increase and when the currency is strong, wheat prices fall.

Important data reports: There several periodic reports that significantly move wheat prices. Some of them include:

  • the USDA Monthly Supply & Demand
  • the Weekly Export Sales
  • Commitment of Traders
  • Spring Wheat Crop Condition
  • Spring Wheat Crop Condition
  • the USDA Prospective Planting Report

Conclusion

Wheat is a staple food in all parts of the world. It is among the most actively traded commodities. The best way to play the wheat commodity market is by trading the futures contracts, which trade on the Tokyo Grain Exchange, Euronext, and CBOT.

You can find more info about futures market here.

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