ZW: Wheat to Rebound with Fed Rate Cuts and Dollar Devaluation
CBOT: Wheat Futures (
ZW1!)
On Friday, July 12th, the United States Department of Agriculture (USDA) released its latest World Agricultural Supply and Demand Estimates (WASDE).
(Note: The WASDE report is published monthly and provides annual forecasts for global supply and use of wheat, rice, coarse grains, oilseeds and cotton, as well as the U.S. supply and use of sugar, meat, poultry eggs and milk. Today’s analysis will focus on wheat.)
USDA’s balance sheet update for the 2023/24 US wheat crop showed a carryout of 702 million bushels (mbu), as exports were taken to 707 mbu. For the new crop, USDA raises the wheat stocks by 98 mbu to 856 mbu. Some of the increases was a larger carryover, but most came in the form of higher production.
USDA raised the wheat crop by 133 mbu to 2.008 billion bushels (bbu). Harvested acres was raised from 38.0 to 38.8 million acres. Yield per harvested acres was raised by 2.4 bushels per acre (bpa) to 51.8 bpa. Winter wheat was up 46 mbu to 1.341 bbu, as the Hard Red Wheat (HRW) total was projected at 763 mbu (+37 mbu), with Soft Red Wheat (SRW) at 344 mbu (+2 mbu) and white winter at 234 mbu (+8 mbu). The initial other spring wheat figure was tallied at 577.8 mbu, more than 56 mbu above market estimate.
Global wheat stocks were raised by 4.97 million metric tons (MMT) to 257.24 MMT, with a bulk from the US, as both Canadian and Argentine wheat production were raised.
Wheat Futures drop across three futures markets, CBOT, KCBT and MGEX, after WASDE shows higher production.
• Jul 24 CBOT Wheat closed at $5.38, down 16 1/4 cents,
• Sep 24 CBOT Wheat closed at $5.50 3/4, down 20 1/2 cents,
• Jul 24 KCBT Wheat closed at $6.04, up 12 3/4 cents,
• Sep 24 KCBT Wheat closed at $5.67 3/4, down 16 cents,
• Jul 24 MGEX Wheat closed at $6.21, unchanged,
• Sep 24 MGEX Wheat closed at $5.97 1/2, down 21 1/4 cents
The weekly CFTC Commitment of Traders report showed CBOT wheat speculative traders net short 69,137 contracts as of July 9th, a reduction of 4,837-contract on the week. In KC wheat, they were trimming 2,292 contracts to 40,811 contracts by July 9th.
In my opinion, the futures market has quickly absorbed the bearish WASDE report. With wheat trading at historical low levels, a rebound may be brewing in the next few months.
Traditionally, August is the time to hedge weather risks in agricultural commodities. If summer weather in the Midwest and Great Plain regions turns out to be less than ideal, the previously expected higher yield will have to be adjusted downward, reducing total production.
In today’s market, how could the expected Fed rate cuts impact commodities?
Last Tuesday, July 9th, Fed Chair Jerome Powell appeared in a Senate Banking, Housing, and Urban Affairs Committee hearing on Capitol Hill.
The Fed Chair expressed concern that holding interest rates too high for too long could jeopardize economic growth. “Reducing policy restraint too late or too little could unduly weaken economic activity and employment.”
“At the same time, in light of the progress made both in lowering inflation and in cooling the labor market over the past two years, elevated inflation is not the only risk we face,” he said in prepared remarks. “Reducing policy restraint too late or too little could unduly weaken economic activity and employment.”.
The prospect for quicker rate cuts increased immediately after these dovish remarks. According to CME Group FedWatch Tool, the probability of a 25bp rate cut in September is now 90.3%. Futures traders look for 3-4 rate cuts by the end of the year, with a 53.8% probability for the Fed Funds rate lowering to the 4.25%-4.75% range.
(cmegroup.com/markets/interest-rates/cme-fedwatch-tool.html)
Would the lower interest rates be bullish for commodities like wheat?
Firstly, lower interest rates will reduce borrowing costs. This will help business grow, with more jobs, income and consumption coming along the way. At the end, it will help increase the demand for commodities such as wheat.
Secondly, as a major agricultural commodity, wheat is priced in the US dollar and traded in the global market. In previous writings I explained that lower interest rates would result in currency depreciation, as prescribed by the Interest Rate Parity theory (IRP).
For foreign buyers, dollar depreciation means an appreciation of their local currency. The cost of importing wheat will be lowered when converted in local currency. Lower costs help increase the demand for wheat.
Trading with CBOT Wheat Futures
The 3-year price chart for CBOT wheat futures shows three distinguished patterns:
• From February to April 2022, wheat prices nearly doubled from about $7 to $13. This was driven by geopolitical crisis and the fear of global supply shortage.
• From May 2022 to July 2023, the Fed implemented 11 consecutive hikes, which helped cut wheat prices by half to about $6.
• From August 2023 to present, as the Fed kept interest rates unchanged in seven FOMC meetings, wheat prices moved sideways in the $5.50-$7.00 range.
As we can see here, Fed policy and geopolitical crisis have an outsized impact on wheat prices, as compared with fundamental supply and demand.
In my opinion, the supply and demand factors are already priced in the market. However, the impacts from Fed rate cuts and outcome of the upcoming presidential election are not yet fully grasped by the market. The expected Fed loosening cycle would have the opposite effect of the Fed hikes. Wheat prices could potentially move up the $7.00-$9.00 by 2025.
On July 12th, the March 2025 contract of CBOT wheat futures (ZWH5) settled at $5.975 per bushel. Each contract has a notional value of 5,000 bushels, or $29,875 at market prices. Buying (long) or selling (short) one contract requires an initial margin of $2,000 at the time of writing.
CBOT lists 15 monthly contracts of Mar, May, Jul, Sep, and Dec. Wheat traders could take up positions two years from now, for the month of July 2026. Trading on the 3rd or 4th contract month would satisfy the liquidity requirements while allowing time for market-impacting variables to change, based on my experience.
Happy Trading.
Disclaimers
*Trade ideas cited above are for illustration only, as an integral part of a case study to demonstrate the fundamental concepts in risk management under the market scenarios being discussed. They shall not be construed as investment recommendations or advice. Nor are they used to promote any specific products, or services.
CME Real-time Market Data help identify trading set-ups and express my market views. If you have futures in your trading portfolio, you can check out on CME Group data plans available that suit your trading needs tradingview.com/cme/
ZW1!)On Friday, July 12th, the United States Department of Agriculture (USDA) released its latest World Agricultural Supply and Demand Estimates (WASDE).
(Note: The WASDE report is published monthly and provides annual forecasts for global supply and use of wheat, rice, coarse grains, oilseeds and cotton, as well as the U.S. supply and use of sugar, meat, poultry eggs and milk. Today’s analysis will focus on wheat.)
USDA’s balance sheet update for the 2023/24 US wheat crop showed a carryout of 702 million bushels (mbu), as exports were taken to 707 mbu. For the new crop, USDA raises the wheat stocks by 98 mbu to 856 mbu. Some of the increases was a larger carryover, but most came in the form of higher production.
USDA raised the wheat crop by 133 mbu to 2.008 billion bushels (bbu). Harvested acres was raised from 38.0 to 38.8 million acres. Yield per harvested acres was raised by 2.4 bushels per acre (bpa) to 51.8 bpa. Winter wheat was up 46 mbu to 1.341 bbu, as the Hard Red Wheat (HRW) total was projected at 763 mbu (+37 mbu), with Soft Red Wheat (SRW) at 344 mbu (+2 mbu) and white winter at 234 mbu (+8 mbu). The initial other spring wheat figure was tallied at 577.8 mbu, more than 56 mbu above market estimate.
Global wheat stocks were raised by 4.97 million metric tons (MMT) to 257.24 MMT, with a bulk from the US, as both Canadian and Argentine wheat production were raised.
Wheat Futures drop across three futures markets, CBOT, KCBT and MGEX, after WASDE shows higher production.
• Jul 24 CBOT Wheat closed at $5.38, down 16 1/4 cents,
• Sep 24 CBOT Wheat closed at $5.50 3/4, down 20 1/2 cents,
• Jul 24 KCBT Wheat closed at $6.04, up 12 3/4 cents,
• Sep 24 KCBT Wheat closed at $5.67 3/4, down 16 cents,
• Jul 24 MGEX Wheat closed at $6.21, unchanged,
• Sep 24 MGEX Wheat closed at $5.97 1/2, down 21 1/4 cents
The weekly CFTC Commitment of Traders report showed CBOT wheat speculative traders net short 69,137 contracts as of July 9th, a reduction of 4,837-contract on the week. In KC wheat, they were trimming 2,292 contracts to 40,811 contracts by July 9th.
In my opinion, the futures market has quickly absorbed the bearish WASDE report. With wheat trading at historical low levels, a rebound may be brewing in the next few months.
Traditionally, August is the time to hedge weather risks in agricultural commodities. If summer weather in the Midwest and Great Plain regions turns out to be less than ideal, the previously expected higher yield will have to be adjusted downward, reducing total production.
In today’s market, how could the expected Fed rate cuts impact commodities?
Last Tuesday, July 9th, Fed Chair Jerome Powell appeared in a Senate Banking, Housing, and Urban Affairs Committee hearing on Capitol Hill.
The Fed Chair expressed concern that holding interest rates too high for too long could jeopardize economic growth. “Reducing policy restraint too late or too little could unduly weaken economic activity and employment.”
“At the same time, in light of the progress made both in lowering inflation and in cooling the labor market over the past two years, elevated inflation is not the only risk we face,” he said in prepared remarks. “Reducing policy restraint too late or too little could unduly weaken economic activity and employment.”.
The prospect for quicker rate cuts increased immediately after these dovish remarks. According to CME Group FedWatch Tool, the probability of a 25bp rate cut in September is now 90.3%. Futures traders look for 3-4 rate cuts by the end of the year, with a 53.8% probability for the Fed Funds rate lowering to the 4.25%-4.75% range.
(cmegroup.com/markets/interest-rates/cme-fedwatch-tool.html)
Would the lower interest rates be bullish for commodities like wheat?
Firstly, lower interest rates will reduce borrowing costs. This will help business grow, with more jobs, income and consumption coming along the way. At the end, it will help increase the demand for commodities such as wheat.
Secondly, as a major agricultural commodity, wheat is priced in the US dollar and traded in the global market. In previous writings I explained that lower interest rates would result in currency depreciation, as prescribed by the Interest Rate Parity theory (IRP).
For foreign buyers, dollar depreciation means an appreciation of their local currency. The cost of importing wheat will be lowered when converted in local currency. Lower costs help increase the demand for wheat.
Trading with CBOT Wheat Futures
The 3-year price chart for CBOT wheat futures shows three distinguished patterns:
• From February to April 2022, wheat prices nearly doubled from about $7 to $13. This was driven by geopolitical crisis and the fear of global supply shortage.
• From May 2022 to July 2023, the Fed implemented 11 consecutive hikes, which helped cut wheat prices by half to about $6.
• From August 2023 to present, as the Fed kept interest rates unchanged in seven FOMC meetings, wheat prices moved sideways in the $5.50-$7.00 range.
As we can see here, Fed policy and geopolitical crisis have an outsized impact on wheat prices, as compared with fundamental supply and demand.
In my opinion, the supply and demand factors are already priced in the market. However, the impacts from Fed rate cuts and outcome of the upcoming presidential election are not yet fully grasped by the market. The expected Fed loosening cycle would have the opposite effect of the Fed hikes. Wheat prices could potentially move up the $7.00-$9.00 by 2025.
On July 12th, the March 2025 contract of CBOT wheat futures (ZWH5) settled at $5.975 per bushel. Each contract has a notional value of 5,000 bushels, or $29,875 at market prices. Buying (long) or selling (short) one contract requires an initial margin of $2,000 at the time of writing.
CBOT lists 15 monthly contracts of Mar, May, Jul, Sep, and Dec. Wheat traders could take up positions two years from now, for the month of July 2026. Trading on the 3rd or 4th contract month would satisfy the liquidity requirements while allowing time for market-impacting variables to change, based on my experience.
Happy Trading.
Disclaimers
*Trade ideas cited above are for illustration only, as an integral part of a case study to demonstrate the fundamental concepts in risk management under the market scenarios being discussed. They shall not be construed as investment recommendations or advice. Nor are they used to promote any specific products, or services.
CME Real-time Market Data help identify trading set-ups and express my market views. If you have futures in your trading portfolio, you can check out on CME Group data plans available that suit your trading needs tradingview.com/cme/
Jim W. Huang, CFA
jimwenhuang@gmail.com
jimwenhuang@gmail.com
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