Wheat: Supply and Demand Drivers

Sometimes referred to as the ‘staff of life’, wheat is the quintessential food grain and is both the most widely grown and widely traded crop in the world. And while other crops have been subject to more advanced processing steps to create alternative uses, wheat today is largely consumed today as it has been for centuries – ground into flour for human consumption or fed as whole grain to animals. Different varieties cater to different applications with the primary distinctions being the plants’ growing season (winter or spring) and quality distinctions of the wheat kernel (“soft” versus “hard”).

1) Key Trading Parameters:

Exchange Traded: Chicago Mercantile Exchange (CME)

Price Quote: US dollars per bushel

Unit of Trade: 60-pound bushel

Futures Contact size: 5000 bushels

Contract Months: March, May, Jul, Sep, Dec

Settlement: Physical Delivery

2) Market Drivers

1. Supply and Demand Dynamics: Wheat production is the most diverse among the major agricultural commodities. China, India, the European Union, and Eastern Europe (Russia/Ukraine) each contribute around 15-20% to global production, followed by North America (US/Canada around 10%) and Australia (around 5%). Wheat is widely consumed globally with North Africa, Southeast Asia and the Mideast being reliant on imports to meet demand. A broad production base with the potential for winter and spring varieties in many geographies creates a complex supply matrix for wheat globally.

2. Quality Considerations: While all wheat can be ground into flour, specific varieties are desirable for different applications. Wheat with higher protein content produces flour with higher gluten content. This higher gluten content is valued in food applications which require more structure – leavened versus flat bread, or pastas versus flat noodles. Higher protein wheats are deemed “hard” while lower protein wheats are “soft”. While protein content can vary within a specific crop, the larger driver is gowing condition and season, such that the whole crop will be deemed ‘soft’ or ‘hard’. Specific futures contracts are dedicated to different wheat types, although delivery of alternate varieties is allowed at established differentials.

3. Directional and Relative-value Trading: With a complex trade matrix, multiple crops within a calendar year and meaningful quality considerations, physical and futures trading in wheat features significant opportunities for relative value and arbitrage trades in addition to directional price movements.

4. Government Intervention: As a dietary staple, wheat prices are highly impactful on consumers, especially in developing economies where food spending represents a higher share of disposable income. This dynamic has led governments in both importing and exporting nations to intervene in markets when supply or demand pressures emerge. Examples of government actions include import and export tariffs, domestic price controls and accelerated procurement and stockpiling programs. The anticipation and implementation of these interventions can create significant reactions in trading markets.