The CBOT soft red winter wheat futures contract is the grain’s global benchmark. Russia invaded Ukraine in late February 2022, sending CBOT wheat futures to a record $14.2525 per bushel high in March 2022 as supply and price concerns caused an upside spike in the grain futures.
On August 10, I wrote on Barchart:
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.
Nearby CBOT wheat futures were at the $6.3875 per bushel level on August 10. On October 27, the price had dropped 10% to around $5.75.
Nearby CBOT wheat prices in late September
Active month December CBOT soft red winter wheat futures prices were at the $5.75 per bushel level on October 27.
The chart highlights the 27.8% decline from nearly $8 per bushel on July 25 to $5.7500 on October 27. After reaching a $5.40 low on September 29, wheat futures have made higher lows and higher highs but remain closer to the low than the late July peak. Meanwhile, the CBOT wheat futures have plunged from the March 2022 $14.2525 per bushel all-time peak.
The October WASDE- Higher U.S. and lower global inventories
The USDA’s October World Agricultural Supply and Demand Estimates Report provides mixed supply and demand fundamentals for the wheat market:
Source: USDA October WASDE Report
While U.S. wheat supplies, domestic use, and ending stocks increased and exports remained unchanged, global wheat inventories fell 0.5 million tons to 258.1 million, the lowest level since 2015/2016. Meanwhile, the global population has grown from below 7.5 billion to over 8 billion, meaning there are more mouths to feed and lower global inventories.
I reached out to Jake Hanley, Sr. Portfolio Manager and Managing Director at Teucrium, for his take on the October WASDE report for the wheat market. Jake told me:
Overall, there was not much by way of surprises in the September WASDE. In a generally bearish report, perhaps one bright spot could be found in wheat, where the USDA pointed out that global production may decline this year for the first time since the 2018/19 season. Otherwise, it was a bearish report for corn, and neutral at best for soybeans.
Wheat:
The USDA lowered its global wheat carry-out projection by 7 million metric tons. The revision is lower than the lowest analyst estimate. The USDA pointed to lower than previously expected production in Canada, Australia, and Argentina. In comments released with the WASDE Report, the USDA points out that the 23’-’24 crop year could be the first year since the 2018/19 season that we’ve seen a decline in global wheat production.
Nearby December CBOT wheat prices closed at $5.56 per bushel on October 11, before the October 12 monthly WASDE report. The price has edged higher since the report to the $5.75 level.
The KCBT-CBOT spread declined but remains elevated
In my August 10 Barchart article, I wrote, “The KCBT-CBOT wheat spread continues to reflect price and supply concerns.” I watch the spread because, “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 spare was at the $1.26 per bushel level on August 10, with the KCBT wheat more expensive than the CBOT wheat.
The chart ({KEZ23} - {ZWZ23}) highlights the significant decline in the spread to just under the 68 cents per bushel level on October 27. While the wheat market remains tight, consumers have become less concerned about price and supplies, causing the hedging activity to decline.
The war in Ukraine continues to rage
Russia remains the world’s leading wheat exporter, and Russia and Ukraine together produced over 10% of the world’s wheat supplies from 2000-2020.
Source: World Economic Forum
The chart shows Russia and Ukraine produce 11.5% of the world’s wheat.
As the war in Ukraine continues to rage, the Black Sea Ports, a crucial logistical hub, is a war zone. Moreover, Russian and Ukrainian wheat-producing areas could be battlefields, limiting future production and exports. With an already tight balance sheet, disruptions from the producers that supply 11.5% of the world’s annual wheat supplies could cause significant shortages and sudden price spikes, as we witnessed in March 2022.
WEAT could offer value at the current price level
Wheat prices have dropped and could offer significant value at the current level. Moreover, wheat prices could be close to a bottom as the war in Ukraine threatens worldwide supplies.
The most direct route for a risk position in wheat is via the Chicago Mercantile Exchange’s CBOT wheat futures and futures options. The Teucrium Wheat ETF product (WEAT) provides an alternative for market participants seeking wheat exposure without venturing into the leveraged and margined wheat futures arena.
At $5.77 per share on October 27, WEAT had over $202.3 million in assets under management. WEAT is a liquid product with over 759,000 shares changing hands daily. The ETF charges a 0.22% management fee. WEAT owns a portfolio of three liquid CBOT wheat futures, excluding the nearby contract to minimize roll risks.
The chart highlights WEAT’s $5.55 to $8.09 per share 2023 range. At the $5.77 per share level on October 27, WEAT is close to the 2023 low.
War in Ukraine, a tight wheat balance sheet, and the significant correction from the highs could mean CBOT wheat futures and the WEAT ETF are close to rock-bottom prices, and a correction could take prices significantly higher over the coming months. However, picking bottoms in any market is impossible, and wheat is no exception. Therefore, the optimal strategy could be small long risk positions, leaving plenty of room to add if the price declines. Wheat and the WEAT ETF offer compelling value in late October 2023. At below $6 per bushel, CBOT wheat is too cheap in the current environment.
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.
