Jan 9, 2021
🍞 Your Guide To Investing In Wheat, The Second Most Consumed Grain In The World
Brief Background
Wheat has been around for tens of thousands of years, cultivated by ancient civilisation across the world. It’s easy to grow, stays fresh for while, & is pretty nutritious. It’s the second most consumed grain in the world, the first being rice. Fun fact: wheat grows on every continent except for Antartica.
What Can It Do For You
🧺 Portfolio Diversification. As always, adding commodities to your portfolio can help diversify and lower risk. Adding wheat to your portfolio means owning an asset that tends to act differently to other asset classes, and even to other commodities. Furthermore, wheat can be a hedge against inflation & a weak US dollar.
💰 Profit. In the long term, since wheat is pretty easy to cultivate compared to other crops (doesn’t require much water, labour, & is able to grow in different climates), wheat demand may grow in developing & emerging economies. Furthermore, it’s essentially competing with corn, so if there is an increased focus in biofuel production, corn will take priority over wheat, which could potentially restrict supply.
What Affects Wheat Prices
There are several key factors that are involved in moving the price of wheat:
- 🌏 Emerging Markets. Developing countries are not only growing in wealth, they’re also growing by population. Not only is wheat for human consumption, it’s also for meat. So as population & wealth grows, so might meat consumption, which means more demand for meat.
- ☀️ Weather. Although wheat is more tolerant than other crops, excessive rains & droughts can still affect yield. However, wheat production is global, which means low yield in one country may be balanced by high yield in another.
- ⛽ Ethanol Market. Corn is used to make ethanol for fuel mixtures. The main principle here is that when ethanol demand rises & becomes more expensive, along with US & EU subsidies for ethanol production, corn for ethanol becomes more attractive for farmers. This affects wheat because there’s more of an incentive to give more land to corn than wheat, which could restrict supply. That being said, wheat can also be used to make ethanol, it’s just that corn is preferred because there’s so much of it.
- 🏛️Government Policy. Whether it’s changing import taxes, drafting trade agreements with other countries or providing subsidies, these policies can have an effect on supply & demand levels, which is then reflected through prices.
- 🔄 Substitution. Yup, substitution can have an effect on prices here too. If corn prices rises, farmers have an incentive to plant more corn, which then restricts the supply of wheat. On the demand side, if corn prices are too high, consumers may switch to other grain alternatives like wheat. A bit like a balancing act.
- 📈 Stock Levels. Stock/inventory levels can play a part in affecting wheat’s prices. When a country uses its stock reserves, it suggests that there’s not enough supply to go around, which can then lead to speculation in the market. Alternatively, large stock/inventory levels will point to oversupply, which can depress prices.
- 💵 US Dollar Strength. Like a lot other commodities, the benchmark for the pricing of wheat is in US dollars. A weak dollar compared to other currencies (i.e. need more USD to buy other currencies) may incentivise foreign buyers to buy (since their currencies are worth more in dollars & so can buy more wheat) & drive up demand, increasing prices, and vice versa.
What Is It Used For?
Quite obviously, wheat is mainly used as food for us & for animal feed. However, it’s also used in a number of other industries:
- 💊 Pharmaceutical Industry. Gluten extracted from wheat can be used to make capsules
- 📄 Paper Industry. Gluten extracted from wheat is used to coat paper products
- 🧴 Health & Beauty Industry. Wheatgerm, part of the wheat plant, is used in creams & is also a health food.
The Case Against Wheat
Wheat prices can only go so high until government intervention steps in. Because billions around the world are dependent on food prices, higher food prices may mean food insecurity for many around the world, which may prompt governments to act to reduce this price. Furthermore, growing wheat stock levels in China suggests there is more supply than demand, which may put a cap on prices. Also, if wheat prices goes too high, it’s vulnerable to substitution with other grains, like barley & rice.
The Case For Wheat
Because wheat is widespread in food production, wheat is a great way to hedge against inflation. When inflation happens, wheat prices also rise, which can offset losses in your other investments. Furthermore, a growing population in emerging economies can also mean growing demand for wheat due to its low-maintenance growth cycle. As climate action becomes more and more pronounced, further ethanol corn subsidies can further restrict wheat supply, which may increase prices.
Popular Ways To Invest In Wheat — Pros/Cons of Each
As an agricultural food crop, you can’t really invest in physical wheat. Here are some of the more popular ways instead. If you’re still confused about how any of these work, refer back to our basics newsletter for a refresher.
- Wheat ETF/ETNs. There are a few options here. There are ETFs that invests in wheat futures contracts, or ETFs/ETNs that invests in corn along with a number of other agricultural commodities. Note that for the ETF that invests in wheat futures contracts, on occasion, there may be times when the actual price of wheat & the price of the ETF share may differ since they invest in futures contracts, a derivative investment. Regardless, they’re traded on stock exchanges, so they’re very easy to buy and sell. Depending on which broker you go with, you may be charged with trading commissions. ETF/ETNs also charge an expense ratio, or management fee that gets taken out of their total holdings and is then reflected on your account. Whichever ETF/ETN you choose, be aware of the fine print — the risks and costs.
- Wheat Stocks. Unfortunately, there are no public companies that solely focus on producing wheat, but there are public companies that somewhat provide exposure to wheat prices. Because of this, you aren’t directly following wheat prices since there are other factors at play. As always, you may want to consider looking at the company’s annual reports (especially operational costs), portfolio of what products they have, which other industries they’re in, and potential product-line expansion plans.
- Wheat Futures Contracts. A binding agreement traded on futures exchanges between two parties where they agree to buy/sell wheat at a specified time in the future with an agreed-upon price. These futures contracts can be settled with physical delivery or with cash after the contracts have expired. Because you are using a significant amount of borrowed money, even small price changes in wheat can either lead to massive profit, or massive losses beyond what you paid for, potentially leaving you in massive debt. They are certainly high-risk and not recommended for beginners. Further, fees associated with futures trading include broker commissions, and exchange/clearing fees.
TL;DR — Is It The Right Investment For You?
As always, it depends on what your aims are. Since wheat is widely used for food production, it can be used as a hedge against inflation. As the second most consumed grain in the world, its low maintenance growth cycle can make it the grain of choice for developing economies to support their growing population & livestock. Furthermore, because of corn’s role in ethanol biofuel production, wheat is essentially competing with corn for land, which means subsidies & government incentives can make wheat less appealing than corn, restricting supply, which can increase prices. That being said, wheat can also be used to make ethanol, it’s just that corn is the preferred grain. However, there are factors at play that can depress wheat prices. If wheat prices reach unsustainable levels, government intervention is likely to occur as many around the world are dependent on stable prices for food security. Furthermore, Chinese wheat stock levels have been growing over the past couple of years, which has the potential to put a cap on prices. Adding wheat to an existing portfolio of commodities, or bundling it up with other commodities, can be a good way to achieve diversification & for wealth preservation.
🧺 If you are considering adding wheat to your existing portfolio or bundling it with a number of others, you may want to consider doing dollar-cost averaging (regular investments over time) to build your wheat position so you can take advantage of any volatility in the market.
💰 If you are considering adding wheat for speculation and profit, you may want to monitor the factors that affect wheat prices mentioned above. You may also want to keep track of any changes in the government subsidies in the EU & the US as this can certainly have an impact. The USDA releases monthly reports of world production, consumption & stock levels, so you can keep track of supply & demand. In addition to monitoring the factors mentioned above, you may also want to consider performing some technical analysis on wheat’s price chart to help consolidate trends and patterns to help with your decision. That being said, its prices can also swing unexpectedly, so be prepared and have an exit plan in place.
As always, if you are unsure, check in with a professional financial advisor before making any moves.
Thank you for reading! Let us know if you found this helpful. You can connect with us @VNewsletters, or check out our website for more information @ vaultcomms.com.
