Wheat Trading: Reaping the Rewards of Bad Weather
Another market attracting spread betting traders in droves is wheat. The soft commodity has hit the headlines due to the fact that shortages caused by bad weather in all the main producing regions could result in the price of the average loaf of bread rocketing. Prices of both corn and wheat are currently at record levels (October 2012) due to drought conditions and low inventory levels. Hot weather in the US also led to fears of lower crop yields and poorer quality harvests.
Traded on CBOT, Wheat is a member of the grain family that includes rye, corn, oats and rice. Wheat is among the most important of cereal crops grown in many regions of the world. It is Canada’s most important grain crop, produced in nine of Canada’s territories.
Exchange – Wheat (W) is traded on the CBOT.
Opening Times
Open Auction: 9:30 a.m. – 1:15 p.m. Central Time, Monday to Friday.
Electronic: 7:34 p.m. – 6:00 a.m. Central Time, Sunday to Friday
Contract Months – July, September, December, March, May
Contract Size
One CBOT Wheat futures contract of 5,000 bushel.
Tick Size
1/8 cent per bushel equates to $6.25/contract.
Average Daily Trading Range – Wheat has recently been exceptionally volatile with ATR approaching 90 cents in 2008. Typical ATR for this market would be in the region of 30 cents.
Spread-Betting Wheat – To spread bet the equivalent of 1 Wheat Futures contract would require a position size of £25 per point. The contract is called Wheat on IG Index
Supplies from Australia – which produced close to 15% of the world’s wheat last year – are coming under pressure thanks to worsening droughts down under. Dry weather has already hit harvests in the US, Europe and India and the news from Australia has forced wheat for December delivery up to $5.34 a bushel on the Chicago Board of Trade. Trading in wheat has been so frantic that the London market went ‘limit up’ – achieving the maximum price increases allowed in a single day by Liffe – twice last week. With many analysts now predicting that wheat will soon hit $6 a bushel, traders are now jumping into the market in a bid to cash in on booming prices.
The US produced 60.1 million metric tonnes of wheat during 2010/2011, but this fell to about 54.4 million metric tonnes for the 2011/2012 year. Production increased in China and India, however this increase is unlikely to make up the shortfall in the USA.
‘We’re starting to see interest in wheat now that it has hit the headlines. Clients are long at the moment – the market has gone limit up twice in recent days and recently reached a 10-year high,’ says Denham. ‘Clients are looking for the next commodity on the move and have decided that softs such as wheat are the place to be.’
Wheat Spread Betting
There are different types of wheat available for spread betting, and generally they respond similarly to market factors, such as weather, supply, and demand. However, comparing wheat prices in different countries requires some accounting for transportation costs, and local demand. At the moment, Paris Milling Wheat is quoted with a sell price of 180.25 and a buy price of 181.50.
If you think the price is going to rise, you could place a long bet for £30 per point at the price of 181.50. As the numbers are fairly small, this spread betting company has a minimum bet size of £30 per point, and that is something that you have to bear in mind when considering the size of your bet.
If the price goes up, you might decide to close the bet and collect your winnings when the spread bet quote was 185.13 – 186.37. The bet closes at 185.13.
Here is how you work out how much you made: –
- Your buy bet opened at 181.50
- It closed at 185.13
- The difference in points is 185.13 less 181.50
- This is 3.63 points
- Your stake was £30 per point
- Multiplying together, you have won £108.90
On more occasions than you would like, you will find that the price goes in the wrong direction for your bet, and you may need to work out how much you lost. Say the price goes down to 178.32 – 179.57, and you decide to close your bet. Working out your losses is similar to the calculation above: –
- Your buy bet opened at 181.50
- It closed at 178.32
- The difference in points is 181.50 less 178.32
- This is 3.18 points
- Your stake was £30 per point
- So your total loss is £95.40
Another type of wheat available for spread betting is London Wheat, and the current price for this is 143.25 – 144.75. Let’s say this time you decide the price is going down and you place a short bet for £100 per point (the minimum bet in this case is £50).
When the price goes down to 138.0 – 139.5, you decide to close your bet and take your profit. You work out the profit like this: –
- Your short bet opened at 143.25
- This bet closed at the buying price of 139.5
- The difference in points is 3.75
- Your bet was for £100 per point
- Simple math shows you won £375
Once again, you must realize that sometimes you will lose and will have to work out how much it cost you. Perhaps in this case the price went up instead of down to a price of 145.9 – 147.4. You close your bet, and figure out your loss: –
- Your short bet opened at 143.25
- The bet closed at the buying price of 147.4
- The difference in points is 4.15
- With the same stake, you have lost £415
This example shows that, if the price does not move much then the size of spread is important. Even though in this losing example the price moved half as far as in the profit example, you lost more money than you won in the first case.
How to Spread Bet Wheat
Wheat is a type of grass, and some say it was first cultivated 10,000 years ago in Asia. It is now one of the most actively traded foods around the world, and is used for far more than simply human food – for instance it can be fed to livestock, and it is often the price that decides whether this or some other food such as corn is used.
Considered as a whole, the European Union is the major world producer, growing more than 1/5 of all supplies, but individual countries rank from China, India, the United States, Russia, down to Australia which still has a significant impact on the price of the market. Japan is one of the biggest importers of wheat in the world. As with all agricultural products, the price can be influenced by the weather, and there is also disease to contend with. Couple this with the seasonality of growing wheat, and you can see that there will be a lot of volatility in the price, which translates to providing opportunities for spread trading.
One thing you must realize when you are doing any type of trading in wheat, is that many others are doing the same and may have significantly more experience than you. Therefore, you need to proceed with caution, and bear in mind the volatility of the price. Certainly, you should research the specifics of wheat production, including the seasonal factors that have been experienced recently, so that you can hit the ground running.
There are several types of wheat available which can be broken into two groups, winter wheat and spring wheat. Note that the season mentioned refers to the planting time, so spring wheat is planted in the spring and grows through the summer, as you would expect. Winter wheat is planted in September or October, and becomes dormant during the winter when the snow arrives, producing a crop in June and July. Wheat can also be classified as “soft” or “hard”.
While demand for wheat as a human food is fairly constant, with wheat flour in bread, pasta, cereal, and other foods, other uses can be much more varied. If wheat is competitively priced with corn, oats, soybeans, and sorghum, then there can be a large demand for supplies for livestock, whereas if wheat is relatively expensive there may be no demand at all.
In addition to this, you must take into account the variation in wheat prices through the year. Depending on the size of crop, prices may go up in the second half of the year, as the early crop of winter wheat usually causes a decline. The US Department of Agriculture issues market outlook reports which cover the amount of crop planted and growing, as well as harvests, and these reports come out most months of the year. If you want to look at the previous year, the information is collected and issued in one publication.
So you need to keep an eye on the weather, and on how other crops are doing. If all crops are good, or bad, then the wheat prices will probably move in concert with others; if the relative amounts of crops vary, then you can expect some differential pricing.
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