Futures Made Simple by Kel Butcher

Author:Kel Butcher
Language: eng
Format: epub
Publisher: John Wiley & Sons, Ltd.
Published: 2012-10-04T16:00:00+00:00

Figure 6.3: trading hours for CBOT grain markets

Source: CME Group Inc.

Wheat

Wheat is one of the oldest and most widely used food crops, having been first cultivated in Asia over 9000 years ago. Wheat is now grown on every continent on Earth except Antarctica and is a vital worldwide food grain. Of the approximately 670 million tonnes of wheat harvested in 2009, the European Union produced 22 per cent, followed by China, India, the United States, Russia, Canada, Australia and Pakistan. Wheat is second only to rice as a cereal food source for humans, being used in a huge variety of ways for human consumption, including for flour, bread, pasta, breakfast cereals and many other food items. Wheat can also used as a feed source for livestock, although it is not typically a preferred option.

In the Northern Hemisphere there are two distinct growing seasons for wheat. Winter wheat, which accounts for around 75 per cent of US wheat production, is planted in autumn, usually during September. It remains dormant through the winter months when a blanket of snow covers and insulates the young plants. Growth resumes in the spring, and harvest takes place in summer, usually in late May through to July, depending on the season. Spring wheat is grown in the northern United States as winters are too severe for winter wheat to survive. It is planted as early as possible in the spring (March) and harvested in late July and August.

Factors affecting price

Factors affecting the price of wheat include the following:

• Because of its role in human food products, wheat demand tends to remain fairly constant. As a result, the main factors affecting the wheat price tend to relate to the supply side and are mainly weather driven, as extreme heatwaves or cold snaps during various stages of crop development can have a huge impact on production. Lack of adequate snow cover can adversely affect winter wheat dormancy. Extreme drought and heatwave conditions can affect spring wheat growing cycles.

• Weather conditions in the other major wheat-growing countries can also affect supply and impact on the world wheat price. Drought conditions in China or India, for example, will affect wheat production in these countries, requiring them to import wheat, which places upward pressure on price. Similarly, in years where production is unaffected by these weather factors, import demand will be less and worldwide wheat prices will fall.

• Government policies such as farmer subsidies and tariffs or other protectionist policies can also impact on both domestic and international wheat prices.

Figure 6.4 shows a weekly price chart of wheat futures from 1987 to 2011. The sharp rises and falls that can occur in the wheat market largely as a response to weather conditions are easily visible.

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