An Epic Wheat Rally Could Soon End. Here’s How to Play It.

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The scorching-hot wheat market looks set for a cool-down. A combination of drought, war, and a wheat export ban in India has sent prices for the grain sky high. But they might now be reaching the end of what has been an epic rally, experts say.

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“The market is so overbought right now,” says Jim Roemer, agricultural expert and author of the Weather Wealth newsletter. “The market squeeze should begin to end in June or July.”

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Or put simply, these sky-high prices likely won’t last many months more, although Roemer doesn’t rule out some volatility before it’s all over.

Wheat futures contracts were recently fetching $12.25 a bushel on the Chicago Board of Trade, more than double the price of around $6 last July, according to data from Trading Economics. The grain is used as cattle feed and for bread and pizza-making, among other things.

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One reason for the wheat price surge is the Russian invasion of Ukraine—a major grain exporter—which put the latter’s wheat crop in potential jeopardy. That exacerbated already-poor weather conditions, where drought has the potential to hurt key growing areas such as France and Spain as well as the southern US Plains. The news earlier this week that drought-ridden India would ban wheat exports added to the tight global market for the grain. Governments are increasingly concerned that they won’t have enough wheat to feed their people.

However, good news is at hand, in part because some weather-related anxiety may be exaggerated. For instance, much-needed rain likely on the way this month for the drought-afflicted US southern Plains from Texas to Kansas, Roemer says. “That could take some of the steam out of the wheat market,” he says. Historically, in years of drought, wheat prices typically peak in mid-May ahead of the harvest, he says.

India’s wheat fields also look set to get some relief. “The rains will come,” says Joe D’Aleo, co-chief meteorologist at forecasting service Weatherbell. “The heat will draw in the required moisture.”

Worries about Europe’s wheat crop might also be overblown. “France and Spain will be on the dry side but not terribly so,” says D’Aleo. That should be considered good news. The European Union is the second-largest wheat exporter.

It is also likely that higher prices will prompt wheat buyers will switch to cheaper substitutes. “Wheat is at the most overvalued level relative to rice in history,” says Shawn Hackett, author of the Hackett Money Flow Commodity Report.

Historically, the price of rice per hundred pounds (hundredweight/CWT) typically fetches around 2-to-2.5 ​​times the cost of a bushel of wheat, Hackett says. However, that ratio has fallen to 1.3 recently, meaning rice is historically cheap. “In that context, the world will buy rice as long as rice prices say undervalued,” he says. Put another way, increased demand for rice and dwindling wheat demand will lift rice prices relative to wheat.

The simplest way for investors to profit from the likely wheat cool-off is to sell long-dated CBOT wheat futures contracts to benefit from falling prices. Exchange-traded fund investors could also sell borrowed shares of the Teucrium Wheat ETF (ticker: WEAT) to achieve similar results.

A more sophisticated approach would be to profit from the likely reversion of the historic price ratio of rice to wheat. To do that, simultaneously buy five CME rice contracts (200 CWT) and sell two wheat (5000-bushel) contracts.

The wheat market is highly volatile, making it risky for any investor. And reliance on weather forecasts adds even more uncertainty to the situation. However, on balance, the potential rewards may be worth the risks.

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Credit: www.marketwatch.com /

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