Grain Opportunities for the Futures of Wheat

wheat field

 Michael Hille/EyeEm/Getty Images

Unlike corn and soybeans, the United States is not the world's largest producer of wheat. However, the U.S. is a major exporter of the grain. Wheat grows all over the world and it is one of the most political commodities. The political nature of wheat stems from the fact that wheat is the key ingredient in bread, which is a staple foodstuff for human beings around the globe.

Governments must make sure to feed their citizens. If people do not have food, governments lose power and there are many examples throughout history where governments have collapsed because of food shortages or increasing prices. Therefore, reasonably priced wheat supplies are imperative when it comes to retaining political power.

Global Annual Consumption of Wheat

Global annual consumption of wheat per person is around 218 pounds or four bushels. As population growth is exponential and the planet adds approximately 441 people to the total population every three minutes, annual demand for wheat increases by 1,604 bushels each three minutes.

The largest producing wheat countries in the world are part of the European Union, China, India, Russia, the United States, Canada, Pakistan, Australia, Ukraine, and Kazakhstan. As an agricultural commodity, annual wheat production depends on weather conditions.

Politics and Global Weather Conditions Can Impact Prices

Floods or droughts around the globe can limit supplies and cause prices to rise. In 2008, droughts caused a small global wheat crop and prices rose to highs of $13.345 per bushel. In 2012, the price of wheat peaked at $9.4725 per bushel. Recently, the price of wheat has moved lower with all grain prices.

Two straight years of bumper crops have sent the price of wheat to lows of $4.60 per bushel in April 2015. In late June 2015, wheat was trading at around the $5.20 level on the active month September wheat futures contract that trades on the Chicago Board of Trade (CBOT) division of the Chicago Mercantile Exchange (CME). By July 10, 2015, the price rose to $5.75 per bushel.

The wheat traded on the CBOT calls for delivery of soft red winter wheat; this is the world's largest and most liquid futures contract for the grain. However, other grades and types of wheat trade on other futures exchanges in the U.S. and around the world.

The weather in the United States, as a dominant producer of corn and soybeans, is a major determinate of those prices. When it comes to wheat, international factors determine the price. Therefore, politics and global weather come into play and establish the price.

As an example, since Ukraine is a major wheat-producing nation, trouble in this nation between the government and Russian supported rebels and separatists in late 2014 caused a brief rally up to $6.77 per bushel. When it became clear that total global wheat production was bountiful prices fell. The Arab Spring uprisings that swept through the Middle East began in late 2010 because of bread riots in Tunisia, a poor wheat crop caused bread prices to rise to levels where many could no longer afford the staple.

At under $6 per bushel on the active month CBOT wheat futures contract, prices stand at the lowest levels in years. Wheat is currently towards the lower end of the trading range that dates back almost a decade. The increasing number of mouths to feed around the planet continues to pressure the demand side of the fundamental equation for wheat.

The Price of Wheat Is Low Compared to Recent Years

Given that weather or a political event could cause the price to move quickly, this market presents many opportunities for traders and investors. Today the price of wheat is low considering where the commodity has been over recent years. Considering that the price of wheat today is over half the value it traded in 2008 and it is easy to see the potential for volatility in this important grain market. Volatility equals opportunity for traders and investors alike.

Wheat trades on futures exchanges around the world and there are ETF and ETN products that reflect price action in this important grain market. Food is a necessity in the world and wheat is a staple foodstuff. At today's price, wheat offers the opportunity for a limited-risk, high-reward trade if anything at all goes wrong with the crop. In the future, growing population guarantees that this important grain will have a great deal of demand-side support.