Wheat futures: basic principles of trading

The group of futures contracts for agricultural commodities (e.g. corn, oats, livestock or cotton) is one of the oldest instruments of commodity exchanges. In particular, a long history can be boasted by the following wheat financial derivative. The importance of cereal crops for the global agricultural industry is extremely high, which ensures the highest liquidity of cereal futures.

 

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Today, in a single trading day, traders to increase their income or producers to hedge their risks buy more than 56,000 contracts on the Chicago Board of Trade CBOT. The futures gain additional attractiveness due to high volatility, which opens up the possibility of earning money in short-term trading.

There are an incredible number of wheat varieties that differ from each other in such characteristics as hardness, color, length and place of growth. Among them, the most popular is the grain grown in the USA. Accordingly, US wheat futures are the most liquid in the world.

Details of the specification of a futures contract:

• Futures traded on the Chicago Board of Trade Exchange CBOT with ticker symbol ZW
• Variety of wheat supplied - red soft winter wheat
• The volume of raw material supply is 5 thousand bushels (about 136 tons)
• Minimum price step - 1/4 cent per bushel (12.5 USD per contract)
• Trading hours in Globex electronic platforms are evening session (Sunday through Friday) 7:00 p.m. to 7:45 a.m. CT (Central Time); day session (Monday through Friday) 8:30 a.m. to 1:15 p.m. CT.

The highest activity of tradersas a rule, is observed closer to the evening time in Moscow (from 19:00 to 22:30). When forming the final price for wheat futures, both data on electronic trading on Globex platforms and the results of open outcry trading, which is held from Monday to Friday 8:30 - 13:15 CT, are used.

Monitoring tools for wheat futures trader

In order to determine the factors affecting the movement in the value of wheat, it is first necessary to limit the areas of use of this cereal crop. The key areas of its application are the production of livestock feed. In addition, bakery and pasta products account for a large share of the total volume produced. There are other, less popular uses of wheat. For example, due to the high concentration of active nutrients, the extract of the grain strengthens immunity and accelerates the healing process of wounds, so it is included in medical preparations. In addition, due to the presence of powerful antioxidants, it preserves the youthfulness of the skin and is a component of many cosmetics. However, the importance of these industries in the context of determining the global value of wheat is negligible.

Data on volumes of raw materials actually and/or expected to be produced and/or delivered - the main reference point for analyzing the further direction of price movement. They are closely related to weather conditions in the countries growing wheat. The palm of leadership in the world production of this cereal during the last twenty years is confidently held by China (more than 115 million tons in 2010), followed by India (80 million tons), the USA (60 million tons) and Russia (41 million tons). By the way, in 2010 the production level of Russian raw materials should have increased by 501 million tons, but the abnormally hot and dry summer did not allow to realize the ambitious plans of the government. The share of the Eurozone is also large in the "total boiler" of production: the volume of harvested grain is primarily at the expense of France, Germany and Great Britain.

Another factor that determines the direction of the wheat price curve is the following product demand dynamics. Among the main consumers of the cereal crop are the European Union, China and India. The latter is currently planning to increase exports, thus creating a certain excitement in the market. It is important to take into account that the pressure on the quotations of wheat futures is exerted not only by the statistics of production and consumption of the grain, but also by the general economic and political situation in the largest producing and importing countries. For example, global financial crisis of 2007-2008 has left a significant imprint on the value of many commodities and agricultural commodities. During a period of severe economic problems, the price of wheat soared to a record high of 1,282.50 cents per bushel (March 2008).

Unlike, for example, futures contracts on energy or precious metals, wheat futures have a cyclical dynamics within a single year. As a rule, the first half of the year (January through May) is a slowdown in activity, while the second half of the year usually has an upward trend. The new wheat harvest begins in July, so it is in this month that investors should pay closer attention to news and trends on the chart, as the probability of a reversal between mid-summer and the end of September is particularly high.

When it comes to specific reports useful for the wheat futures trader, it is worth mentioning Crop Progress Reportwhich is published weekly. It will tell you how ripe your crops are and help you determine the approximate harvest date. Another important statistical document is US and World Supply & Demand Report - monthly helps to get an idea of the balance of global supply and demand for raw materials.

Derivatives on agricultural staples, influenced by similar factors, mark high correlation within their group. The similar direction of agricultural commodity prices arises due to the fact that in most cases the key producers and consumers are the same countries. For example, the cost of wheat and corn futures shows a high level of correlation (see the illustration above). The dependence is especially strong during periods of consolidation. Sharp movements of charts to maximums or minimums also coincide. However, here it makes sense to speak about the presence of identical trends, as the time of their realization may differ. Recently, analysts often mention the pressure of corn price on wheat price. Anyway, the presence of high correlation cannot be denied, which means that it should be taken into account when analyzing and forecasting quotations.

Current situation on the wheat market

Supporting the downward trend covering almost the entire group of agricultural commodities, the trading volumes of wheat futures contracts for 2013 decreased by almost 4% (from 1,439,517 in December 2012 to 1,383,342 in December 2013).

In December 2013, there was a stable weakness with a gradual pullback in the corridor of 675.00-600.00, which is explained by the seasonal December lull and waiting for annual reports to determine further strategy. As a result of lower demand for U.S. wheat and simultaneous growth of raw material production to record figures (more than 711 million tons) in January 2014, quotations fell to the lowest value in the period since mid-2010. The timid upward trend that emerged today was due to concerns about crop failure as frosty weather with little rainfall settled in the northern regions of the United States.

Wheat futures are in great demand by manufacturers, who use them to hedge risks The contracts are also useful for traders who play on volatility in the short or long term. In addition, these contracts are also useful for traders who play on volatility in the short or long term.

Sergey Krasikov, Senior Financial Consultant, Saxo Bank Russia