Commodities are so freely traded because they are generic in nature. One barrel of standardised crude oil is the same as another barrel, so they can be freely traded on quantity through an exchange, without recourse to their quality. That principle is extended to crops, many of which are openly traded on the global commodity exchanges as part of the food manufacturing process. Arguably the most notable crop commodity traded on the exchanges is wheat, and as a spread betting proposition, the wheat market is a particularly interesting one to get involved in.
Why Spread Bet on Wheat?
Wheat is an essential component in a number of staple food stuffs. Anything made from flour (including bread) is dependent on wheat, thus the price of wheat per bushel is often an important factor in contributing to global food prices. At the same time, wheat is affected by supply and demand in the same way as many other commodities, with weather and the harvest factoring in on pricing in a direct way. Likewise, a current trend amongst crop growers to change their focus from food stuffs to grains that produce alternative fuels is pushing prices up even further, and the agricultural and political climate in which growers operate will have a continued impact on how prices respond.
On the demand side, emerging economies and growing national wealth often lead to price rises in the wheat market, and so in forecasting these rises traders can effectively capitalise on price rises through their spread betting broker.
As a relatively stable commodity in comparison to many others, wheat prices are more directly variable to weather and growing conditions and the interplay of supply and demand. As a result, that makes predicting wheat prices a relatively more stable endeavour, particularly for spread betting.
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Who Trades Wheat?
Wheat is traded primarily by food manufacturers and private investors. Whereas private investors trade wheat for price speculation purposes, and for diversifying their portfolio to hedge against risks in more traditional markets, food manufacturers and end users rely on their wheat supplies in order to service the demands of the market. Customers worldwide demand wheat and wheat produce to form the staples of their diet, from pasta to noodles, and the companies that provide these products rely on wheat, whatever the price, in order to carry on with their trade. As a result, we see even high wheat prices being absorbed by the market, thus demand from the food manufacturers is relatively price inelastic. This makes wheat an excellent product to trade, given that its demand is evergreen – after all, consumers will still need bread, even if prices rise by 50 or 100%.
How to Trade Wheat Effectively?
Because of wheat’s relatively static pricing bands, the best time to trade wheat is on announcements of stockpiles, such as the US Department of Agriculture, which periodically announces its stockpile figures for wheat and gives traders an indication of how supply is looking. Trading wheat effectively requires you to be tuned in to announcements of this kind, as well as developing a close understanding of how wheat prices are influenced. Become an expert in where wheat is grown, and try to keep a round-the-globe profile of how wheat supplies may be affected. By coming to terms with how wheat behaves, and the factors that might impinge on its pricing, you can trade with the momentum of the commodity markets to spread bet on wheat as a highly lucrative, and often wildly volatile market.