Dear readers of our blog! We continue our review of the wheat futures, one of the most liquid futures of the agro-industrial sector. If you haven’t read the first part of this article yet, please, read it.
In this article:
- Influence of the world economy on the wheat market.
- Influence of the weather and seasonal changes on the wheat futures.
- Wheat market forecasts and reports about the wheat market state.
- Influence of the USD exchange rate on the wheat futures contract prices.
The state of the global economy strongly influences the wheat prices in the world markets, as well as consumer goods prices. It happens because important factors come into play. One of such factors is the oil market, which can spur the dynamics of demand and supply.
Economic development slowdown results in a smaller size of investments in the agro-industrial sector and also in reduction of requirements in financing farms, which leads up to a smaller and more expensive harvest.
A smaller wheat production volume could lead up to higher wheat prices, especially when traders look at the futures from the point of view of the month, during which a contract is traded, and the trading year in the system of grain sales.
The weather factor is an important aspect, which exerts influence on all futures of the agro-industrial complex, including the wheat ones. This aspect is especially critical during sowing and may, in the end, influence the yield.
For example, in June 2015, the wheat futures prices skyrocketed up to six-month highs due to an extremely high demand caused by bad weather in some regions that produce wheat.
Heavy rainfalls, dry weather, excessive heat or hurricanes can damage the output yield, which often stimulates the price growth in the wheat futures market.
Futures traders that trade wheat should pay attention to such climate phenomena as El Nino (the water surface temperature fluctuations in the equatorial part of the Pacific Ocean), which exert significant influence on the crop yield, especially in the Northern Hemisphere.
Weather could have a significant influence on the crop yield depending on the wheat variety – spring or winter.
Spring and winter wheat varieties are two main grain crops. Spring wheat planting in the US and Canada takes place in April and harvesting takes place at the end of summer. Consequently, it doesn’t have a dormant period as the winter wheat does. The winter wheat is planted in September and the planting period lasts until the end of October in the southern regions of the US.
Unlike the spring wheat, the winter wheat germinates and passes a dormant period while the weather is still cold. The winter wheat ripens and is ready for harvesting in June-July.
As a source of fundamental data, reports about the state of the agro-industrial complex are an integral part of the future price forecasting for traders and speculators that trade in the futures markets.
The US Department of Agriculture (USDA) report on the wheat production sector is one of the reports, which is able to significantly move the grain crop market. This report is also known as the USDA report, which provides traders with an insight into the current situation in the wheat market on a regular basis. Its official name is the USD Wheat Outlook.
Simply speaking, it combines information about grain crops, area under crops and forecasted demand. These data reflect a complete picture of the agricultural market. This report is published on the tenth of each month and considers the prospects of the national and world wheat markets in detail.
Another US Department of Agriculture (USDA) report is a Wheat Yearbook, which provides traders with a brief wheat market review for the previous and current years. It is published in March every year and contains news about wheat production abroad, levels of storage stocks, prices and consumption volumes.
International reports about wheat prices are also of importance along with the American reports. These are reports of such countries as Australia, Canada and Japan, which are major players in the wheat grain exports and imports.
There are some other independent reports apart from the above listed ones, such as, for example, the Grain Market Report, which is published once a year and which provides the market participants with an analytical review of this type of product.
The weekly Commitment Of Traders report, regularly published by the Commodity Futures Trading Commission, can serve as an excellent source of analytical information for the intraday futures traders about the mood of major players. It contains information about the number of open short and long positions in the futures market. Significance of this report lies in the fact that all market participants (minor speculators, major traders, hedgers and operators who really accept delivery under contracts) report on their open positions. American legislation obliges them to make such a report in order to ensure transparency of the market functioning.
Since the wheat futures prices are denominated in USD, the exchange rate of this currency plays an important role in the price formation. Futures traders, who trade wheat, need to pay attention to possible consequences of the monetary policy, which influences exchange rates.
It should also be noted that investors have to be ready for any USD exchange rate volatility since the current Trump Administration’s approach to exchange rates is more simple and straightforward than the approach of the Obama Administration.
So, we should note, while drawing conclusions of our review that traders who trade wheat futures work with a commodity, which combines both long history and high volume of liquidity. Of course, there are other wheat derivatives, such as options, the expiration period of which is one week. They are quite popular among the market participants, since they come to the options market in large numbers in order to hedge possible risks. Options protect hedgers against an unfavourable price change and may bring them profit if the price changes favourably. Moreover, a guarantee collateral (margin) is not required for buying options, that is why there is no risk of a requirement to make an additional payment.
The wheat futures contracts withstood the test of time and, which is even more important, they managed to adapt to new technologies, which came to the market. Many market veterans consider wheat (and grain futures) to be a key chain in the world channel of supplies, that is why it is not surprising that the major share of the wheat market participants are suppliers and consumers.
The wheat futures market is an ideal place for an average intraday trader to make money. Nevertheless, traders need to trade wheat futures very carefully, since their risks are no different from the risks of the other futures contracts.