| Wheat looks set for a breakout period |
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| With global warming threatening its rate of production, and with an increasing demand for the crop as a source of ethanol, wheat looks like it will surge in price, says John Hall. He recommends that speculators position themselves to reap the benefits from the potential surge. |
The trademark of a successful investor is to get in and out of the market at the right time. Joseph Kennedy famously sold out his stock holdings just days before the 1929 stock market crash after a shoe shine boy reputedly gave him a hot tip while shining his shoes. Kennedy's rationale was that if shoe shine boys are buying stock, to whom could the shoe shine boys sell that stock?
The astute investors who moved into the property market 10 to 15 years ago may well be heeding the actions of Joseph Kennedy by moving out of property as the market begins to reach saturation point, especially as the shoe shine boys were tipping property heavily in the past 12 months or more. For the moment, very few people are talking about bread.
Bread is produced from wheat, which no one is talking about at the moment. But it may well become a hot investment topic amongst professional commodity speculators in the near future.
Commodities tend to be the backwater of the investment world, but huge profits have been made in recent years in the energy and metals markets as prices have soared due to growing demand, and the grain markets are now poised to move ahead. Savvy investors could profit by taking a closer look at the wheat market in the coming months.
There is no emotional content to the price of wheat; its price is governed by supply and demand, which in turn is influenced by a variety of factors. Most prominent of these would be the quality of the harvest and how much has been stockpiled in grain silos and warehouses. Weather has a direct impact on wheat production; it takes around 1,000 tonnes of water to produce a tonne of grain so wheat is grown in areas that have consistent rainfall. Global warming has threatened the traditional growing areas for wheat; already Australia is seeing regular drought conditions and the Great Plains of the USA are particularly vulnerable to the effects of global warming.
Additional demand is being placed on wheat supplies for use in non-food products, including ethanol production. Ethanol is a clean burning fuel derived from plant sugars, and biomass from wheat straw is now being used to produce this fuel. The demand for food-grade wheat in this industry is rising. Crops capable of producing ethanol are becoming increasingly desirable, and speculators may be able to profit from this increase in demand, as well as a possible reduction in production due to lower rainfall and loss of suitable growing areas.
The main trading area for wheat speculators is on the Chicago Board of Trade, which began trading on April 3rd 1848. Originally a centre for the delivery and sale of grain. It has now developed into a major financial centre with products across a wide range markets, including agricultural products, interest rates, metals and Dow Jones Index futures contracts. Wheat is traded in fixed contract lots of 5,000 bushels (a bushel weighs roughly 60lbs). Prices are quoted in cents per bushel and contracts are settled in the months of July, September, December, March and May. The exchange trades both on open auction and electronic trading and most investors and speculators trade via approved clearing houses appointed by the exchange or through approved brokers.
Up-to-date market intelligence is paramount to successfully trade in the wheat market. Patience and timing are key factors when deciding to trade. Technical information is also highly effective. Wheat is a cyclical market with well-defined peaks and troughs which allow experienced traders to enter and exit the market at the right time.
Wheat has traded in the band of 250/260-540/560 for the past 25 years. Buy signals occurred around the 250/260 area and sell signals were triggered between 540 and 560. There is an additional trading band around the 310/430 zone as well for shorter term speculators.
But we may be seeing the potential for a breakout, which could see wheat prices move to substantially higher levels due to shortening supply and increasing demand. Copper is another raw material that has been soaring. Its growth occurred on a recent technical breakout due to increased global demand.
Between 1972 and 2004 copper showed a similar trading pattern to wheat, oscillating between lows of 60 cent per pound and highs of 130 cent per pound. When copper broke through the upper resistance levels in September 2004 due to high demand and supply shortages its price went through the roof, reaching record highs in 2006.
There is no guarantee that wheat will follow the same course as copper, but all the fundamental and technical evidence is beginning to point in the direction of a major price surge in wheat, on a breakout above the old tops of 540 and 560 cents per bushel. Professional traders will be keeping their powder dry until the market moves above this level but my money will be going into the market on the breakout.
If you want to profit from the wheat market, now is the time for informed investors to position themselves for the potential breakout, and the time to sell will be in a few years when everyone is talking about the high price of bread and the shoe shine boys are giving hot tips on the price of wheat. |
John Hall is a professional commodity analyst and market trader.
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| Article appeared in the May 2007 issue.
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