Wheat is one of the most important and widely used commodities in the world. People often opt for investing in wheat as a way to hedge their portfolio against inflation, but also to diversify their holdings and generate profits. In this article, we’ll introduce you to everything you need to know about investing in wheat and how to include wheat in your investment portfolio.
Wheat and global food crisis
The conflict between Ukraine and Russia has triggered a major food crisis in many developing countries worldwide. Ukraine, a significant wheat producer, stopped exporting food, worsening the already challenging conditions in many nations.
Several factors have negatively impacted the food market. These include increased food demand following the pandemic, extreme weather events, disruptions in supply chains, and export restrictions. The invasion of Ukraine has exacerbated the global inflation problem, causing the United Nations’ Food Price Index to reach its highest point since its inception in 1960.
The tension in Ukraine has particularly affected the global food market because Ukraine and Russia together supplied 90% of wheat to countries like Armenia, Azerbaijan, Eritrea, Georgia, Mongolia, and Somalia. Ukraine is also a crucial source of wheat for the World Food Program, which provides food aid to nearly 120 million people in 100 countries.
Moreover, access to vital raw materials like oil and natural gas has been significantly reduced worldwide. Additionally, a substantial portion of the world’s fertiliser supply, essential for agriculture in countries with less fertile soil, has stalled in Russia and Belarus.
This conflict and resulting scarcity have led to an unprecedented increase in food prices. The rising prices are contributing to a global cost of living crisis, particularly affecting emerging economies.
How does the wheat market work?
The wheat market works similarly to most markets and supply and demand have a direct impact on its price. In addition to agricultural companies or ETFs that track wheat prices, wheat is closely linked to futures trading, like most commodities. Here are some key factors that influence wheat prices:
- Weather: Weather conditions in regions that dominate global wheat production greatly influence its price. Extreme weather events such as heavy rains or droughts can reduce crop yields, leading to a decrease in the available supply of wheat. The regions with the highest wheat production worldwide are Eastern Europe, China, and India. Traders in the wheat market closely monitor the weather in these areas to predict potential changes in wheat supply.
- Geopolitics: Just like weather, wars and domestic issues can cause serious disruptions in global supply chains. For example, almost a third of the world’s wheat is grown in Russia and Ukraine, so the political conflict has driven up prices and sparked a strong fear of a global wheat shortage. Given the high volatility of wheat prices in recent months, this commodity has become a favoured choice for short-term traders.
- Population growth: The global population has continued to grow in recent decades, a trend that is expected to continue. Developing countries, in particular, are experiencing significant population growth, which drives overall wheat consumption. This makes wheat a commodity with strong demand prospects.
- Currency exchange rates: Most commodities, including wheat, are priced in US dollars. When the US dollar strengthens against other currencies, the price of wheat tends to rise because importers must pay more for it. Conversely, a weaker US dollar typically leads to lower wheat prices.
- Storage: Wheat is stored on a large scale, with China being a prominent player. China holds the largest share of stored wheat globally, accounting for nearly two-thirds of the world’s reserves. Changes in China’s grain storage practices can have a significant impact on wheat prices.
Why should you invest in wheat?
Investing in wheat can offer several advantages for investors. Here are the main reasons why it can be a good idea:
- Hedge against inflation. Wheat, like many other commodities, tends to rise in price when inflation is on the rise. Inflation can erode the purchasing power of your money and increase the cost of living. By investing in wheat during periods of high inflation, you can protect your wealth from the effects of rising prices.
- Portfolio diversification. Many investors primarily focus on stocks, bonds, or funds. Adding a portion of wheat or other commodities to your portfolio can be a smart move to diversify. This diversification can help make your portfolio more resilient during times when other assets may not perform as well.
- Foreign exchange expectations. Since many commodities, including wheat, are priced in US dollars, analysing the dollar’s strength can help predict wheat market movements. When the dollar becomes stronger relative to other currencies, wheat importers face higher costs, potentially driving up wheat prices. Conversely, a weaker dollar can make wheat more affordable globally.
- Global demand. Wheat is a staple food worldwide, used for both human consumption and livestock feed. With the ongoing development of emerging countries, the demand for wheat is expected to increase due to its utility. Investing in wheat allows you to tap into the growth of the global population, especially in developing nations.
The global political and economic outlook for the next year is uncertain. With the war in Ukraine still unresolved and inflation on the rise, wheat prices could continue to rise strongly. Despite this, the current food prices may be difficult to maintain in the medium term, so it could be the case that consumers and importers begin to opt for cheaper cereals or governments may intervene to stabilise prices.
How to invest in wheat with Interactive Brokers
Investing in wheat is a simple process, we just need to follow a few steps to get exposure to this commodity:
- Establish a strategy: Before you begin, define your investment goals, such as required return and risk appetite. You can choose different investment vehicles such as ETFs or futures based on your specific strategy.
- Research the market: Familiarise yourself with the wheat market to make informed investment decisions. Understand the various methods available for investing in wheat based on your objectives.
- Allocate an appropriate weight: Determine the optimal percentage of your portfolio to allocate to wheat. Recognise that wheat can be a volatile investment and consider the level of risk you are willing to assume.
- Short or long term: Depending on your research and market analysis, decide whether there are better short-term or long-term opportunities in the wheat market. Select the appropriate investment product for your specific strategy.
- Finding a suitable investment platform: Wheat is a commodity traded worldwide, so many brokers will offer us the possibility to invest in it. However, as always, some platforms are better than others. Choosing a good online broker like Interactive Brokers that gives market depth and robust tools for executing your orders effectively.
Ways to invest in wheat
There are several ways to invest in wheat. Below, we’ll discuss the most important ones:
Here are some of the most important companies to invest in wheat and other commodities:
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Alternatively, you can opt for funds (such as exchange-traded funds) for a longer-term strategy or a more diversified investment. If you are new to funds, have a look at index funds vs. ETFs, how to choose an ETF, and the best ETF brokers.
Alternatives to investing in wheat
- Investing in commodities
- Investing in metals
- Investing in oil
- Investing in precious metals
- Investing in silver
- Investing in water
Investing in wheat: summary
In summary, investing in wheat can be a valuable addition to your investment portfolio, offering protection against inflation, diversification benefits, and exposure to global demand trends. By following a well-thought-out strategy and conducting thorough market research, you can make informed investment decisions in the wheat market.
Is investing in wheat a good hedge against economic uncertainty?
Yes, investing in wheat can serve as a hedge against economic uncertainty. Wheat prices often rise during periods of economic instability, such as wars or financial crises. These uncertainties can disrupt global supply chains and impact wheat production. As a result, investors often turn to wheat as a safe haven asset to protect their wealth during turbulent times.
What are the risks associated with investing in wheat?
While investing in wheat can offer opportunities, it also comes with risks. One significant risk is weather-related. Unpredictable weather patterns, such as droughts or floods, can lead to crop failures and volatile price fluctuations. Additionally, changes in government policies or trade restrictions in major wheat-producing countries can affect supply and prices. It’s important to be aware of these risks and conduct thorough research before investing.
Does the global wheat market have any seasonal trends that investors should be aware of?
Yes, the wheat market does exhibit some seasonal trends. Wheat planting and harvesting seasons can vary by region, affecting supply and prices. For example, in the Northern Hemisphere, wheat planting typically occurs in the fall, while harvesting takes place in the summer. Prices can be influenced by weather conditions during these crucial periods. Investors should be mindful of these seasonal patterns when considering their entry and exit points in the wheat market.