A Perfect Storm is Gathering for Wheat Prices

by Tim Maverick
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A Perfect Storm is Gathering for Wheat Prices

A Perfect Storm is Gathering for Wheat Prices

In a previous article, I discussed why beef prices are elevated and will remain so through at least next year. And as it turns out, we’re entering a new age of higher prices for many agricultural commodities.

Around the globe, a perfect storm of events has begun to push the price of wheat higher (north of $7 per bushel). And as wheat prices rise, it’ll affect the price of flour and bread. In fact, flour has already jumped about 10% in cost over the past year.

But what’s behind the rapid increase in the price of wheat?

There are three main factors at work . . .

Factor #1: Drought Takes its Toll

Factor number one is the ongoing drought in several key U.S. wheat-growing regions, such as the Southern Plains, which stretches from Texas to southern Nebraska. The drought is entering its fourth year in this area.

Meanwhile, Kansas – the nation’s predominant wheat-grower – is experiencing an “extreme” drought across roughly 20% of the state. It may even be too late for rain to save some of the state’s wheat crop.

Overall, the U.S. Department of Agriculture expects wheat growers in the Southern Plains to reap just 744 million bushels of wheat this year – 25% less than last year’s total.

That’s a harsh blow, but it’s far from the only issue driving prices upward.

Factor #2: Putin’s Play

The second reason global wheat prices are skyrocketing is Vladimir Putin . . .  and, specifically, his actions in Ukraine.

You see, Ukraine alone accounts for 6% of the world’s wheat export market, while Russia is responsible for another 11%.

Putin’s incursion in Ukraine has stirred fears of an export ban, which would cost the world nearly one fifth of all its wheat exports.

Meanwhile, financing for Ukraine-based grain export companies is getting harder and harder to obtain. On top of that, there are drought conditions in some parts of the wheat-growing areas of Russia and Ukraine.

Factor #3: China is Hungry

The third factor involves the number 5,319.1%, which is the percentage change in Chinese wheat imports for December 2013 as compared to December 2012.

China already consumed more wheat than any other country, but poor weather really turned the country into a major wheat importer.

Imports jumped to 5.5 million metric tons in 2013 – from less than one million tons in 2012, including a whopping 3.8 million tons from the United States alone.

Most analysts believe that China simply can’t be self-sufficient any longer when it comes to wheat, and that imports will become a fact of life for the world’s most populous country.

Whole-Grain Profits

Bottom line: All of these factors add up to a pure-play investment based on the price of wheat.

The Teucrium Wheat Fund (WEAT) is an exchange-traded fund (ETF) that holds futures contracts on wheat traded on the Chicago Board of Trade (CBOT). Currently, it’s up about 25% from its 2014 low.

WEAT’s portfolio consists of three contracts: the second-to-expire CBOT wheat futures contract (35%), the third-to-expire CBOT wheat futures contract (30%), and the CBOT wheat futures contract expiring in the December following the expiration month of the third-to-expire contract (35%).

ETFs like WEAT offer investors the ability to play commodity futures without the need for a futures account. So if you’re looking for a way to profit from rising wheat prices, consider this opportunity.

And “the chase” continues,

Tim Maverick

The post A Perfect Storm is Gathering for Wheat Prices appeared first on Wall Street Daily.

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