My Q2 Barchart article on the grain markets documented that CBOT wheat futures fell 8.09% in Q2 and were nearly 20% lower over the first six months of 2023. Nearby wheat futures settled at $6.3625 per bushel on June 30. In the Q2 piece, I wrote:
Geopolitics and the weather will determine the path of least resistance of prices over the coming months and years. Grain prices were mostly lower in Q2 and over the first half of 2022, but that does not mean they will not come storming back later this year.
At the $6.3875 per bushel level on August 10 for soft red winter wheat for September delivery, the price is marginally higher than at the end of Q2. Meanwhile, nearby CBOT wheat futures have been volatile, trading to a $7.7725 high in July before pulling back. The Teucrium Wheat ETF product (WEAT) tracks the price of a portfolio of actively traded CBOT wheat futures contracts.
The world’s leading wheat-producing and exporting countries
In 2022, the world’s top ten wheat-producing countries were:
Source: Statista
The chart shows that while China, the European Union, and India are the three leading wheat producers, Russia and Ukraine together would be the third-leading wheat producers.
Regarding exports, the pre-Ukraine war statistics highlight why the ongoing conflict threatens the world’s wheat supplies.
Source: beef2live.com
The chart illustrates that in 2018, Russia and Ukraine exported 32.83% of the world’s wheat, making the countries Europe’s breadbasket. Exports flow from the Black Sea Ports. Since early 2022, Russian and Ukrainian fertile wheat fields have been battlefields, and the Black Sea Ports have been a warzone threatening worldwide wheat supplies and pushing prices higher. In 2022, nearby CBOT wheat futures rose to a record high at over $14 per bushel before correcting. Russia and Ukraine exported nearly one-third of the world’s wheat in the past years, putting pressure on other countries to make up for losses because of the ongoing war.
Russia uses wheat as a weapon
Sanctions on Russia and Russian retaliation have caused Moscow to use energy and wheat as economic weapons in its war against Ukraine and the countries supporting Ukraine. Oil and wheat prices jumped to multi-year and all-time highs after the Russian invasion. While prices have come down, Russia continues using energy and grain markets as tools. Aside from punishing the U.S. and NATO countries, Russia depends on the revenues from its wheat and oil production to fund its war efforts.
Over the past weeks, Russia has bombed grain silos and loading facilities in Ukraine. Moreover, Russia pulled out of a deal that allowed grain-laden ships to sail from Ukrainian ports. Ukrainian President Zelenskiy recently said, “Moscow is waging a battle for a global catastrophe. In their madness, they need world food markets to collapse; they need a price rise; they need disruptions in supplies.” The gain deal expired after July 17 when Russia withdrew, and the escalation of the war and increased bombing have impacted wheat markets, causing the most recent rally.
Wheat prices have been volatile
Wheat futures have been volatile since mid-July.
The six-month chart of CBOT wheat futures shows the price exploded over 32% higher from $5.8775 on May 31 to $7.7725 on July 25. At the $6.3875 level on August 10, the September futures were below the midpoint of the recent trading range.
The KCBT-CBOT wheat spread continues to reflect price and supply concerns
The average of the KCBT hard red winter wheat versus the CBOT soft red winter wheat spread since 1970 has been around a 30 cents premium for KCBT wheat. Since many U.S. bread manufacturers price requirements use the KCBT price, the spread reflects consumer sentiment. A rise in the KCBT premium highlights price and supply concerns.
The chart ({KEU23}-{ZWU23}) shows the rise to a record high in the premium for KCBT over CBOT wheat in May 2023., At the $1.2600 per bushel level on August 10, the spread remains over four times the historical norm, indicating consumers are apprehensive about higher wheat prices and scarce supplies.
The high level of the spread and ongoing Russian tactics to punish Ukraine and those countries supporting Ukraine should keep a bid under worldwide wheat prices and cause increased price variance to continue.
WEAT will track CBOT wheat prices - Expect volatility to continue
CBOT wheat prices have experienced hair-raising volatility since Russia invaded Ukraine.
The twenty-year CBOT wheat futures chart highlights the March 2022 explosion to $14.2525 per bushel, and the implosion took the price to a $5.7325 low in May 2023, where it found at least a temporary bottom. The recent move to nearly $7.80 per bushel indicates that wheat volatility will remain high as the war continues, with the odds favoring even higher prices over the coming months.
The most direct route for a risk position in CBOT wheat is the CME’s CBOT wheat futures and futures options. To mitigate roll risks, the Teucrium Wheat ETF (WEAT) owns three CBOT wheat futures for future delivery, excluding the active month. At $6.52 per share on August 9, WEAT had over $190.231 million in assets under management. The highly liquid ETF trades an average of over two million shares daily and charges a 0.22% management fee. The ETF tends to underperform the nearby wheat futures price action on the upside and outperform during corrections because the most speculative activity tends to occur in the nearby contract.
September wheat futures rose 32.2% from $5.8775 on May 31 to $7.7725 on July 25 before correcting 19.4% to $6.2625 on August 3.
Over the same period, WEAT rose 26% from $5.88 on May 31 to $7.41 per share on July 24. WEAT corrected 13.4% to $6.42 on August 3.
WEAT will track a portfolio of CBOT wheat futures as the world’s highly political commodity continues to be a hostage of the ongoing war in Ukraine. Expect volatility to continue, so buying dips could be the optimal approach.
On the date of publication, Andrew Hecht did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
