Looking For Action? Check Out Wheat
Futures
The Dynamic Wealth Report
September 7, 2010
by Jay Chernoff, Editor
Have you seen wheat prices lately?
Talk about a wild ride… I’ve never seen anything like it in more than 15
years of trading.
Wheat futures prices are all over the place. Huge swings are occurring
on almost a daily basis. In fact, wheat had one of its biggest daily gains
ever in early August. And then out of nowhere, the price cratered.
The wheat market isn’t for the timid. But if you’re looking for some
action, you should watch how fast wheat futures can move.
I actually started my trading career in the wheat futures market. I
worked for awhile on the floor of the Kansas City Board of Trade (KCBT).
The KCBT actually trades an extremely important product… hard red winter
wheat.
The entire world uses this wheat to make bread. And it’s a very active
commodity.
I remember some crazy days when I worked on the KCBT. Wheat prices would
fly all over the place. Traders would be screaming at the top of their
lungs. Papers would be scattered everywhere. It got so loud sometimes
you couldn’t even hear yourself think.
The current roller coaster in wheat reminds me of my days on the KCBT.
Only this time it’s even crazier.
So what’s causing all the volatility?
To put it simply… drought.
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Let me take a step back…
There are a handful of factors which move the price of wheat.
First, there’s consumption. In other words, the amount of wheat being
eaten by humans and animals.
As consumption increases, so does the price of wheat. Population growth
is one major reason why consumption rises.
Economic conditions can also impact consumption. For example, people
living in China may not ordinarily be able to afford wheat products.
Instead, they buy cheaper products made from rice. But as economic
conditions improve, the Chinese start substituting wheat products for
rice products… and this drives wheat prices higher.
Then there’s the currency impact.
As a rule of thumb, as the U.S Dollar falls, the price of most
commodities, like wheat, typically rise. For the last few months, the U.S.
Dollar has been moving lower… and it’s pushing around wheat prices. Of
course it’s a lot more complicated than that, but for our purposes let’s
keep it simple.
Another major factor affecting wheat price is weather.
Wheat is an agricultural product. So of course it’s impacted by Mother
Nature.
Good or bad weather conditions significantly influence the production of
wheat. Temperatures too hot or too cold. Too much rainfall or not
enough. Hail, wind… almost everything can impact wheat production.
Anytime adverse weather conditions hit, it changes the projected supply
of wheat crop. And changes to supply expectations can cause the price to
jump around.
With all these factors, it’s no wonder wheat prices move so much…
What’s more, fundamentals can and will move wheat prices to extremes.
Back in 2008, there were major shortfalls of wheat. Demand was increasing
in leaps and bounds. Wheat prices reached record levels over $13.00 a
bushel.
We even witnessed food riots because of the price…
And now we’re once again seeing how a wheat shortage really makes wheat
futures go haywire.
As you’ve seen from the news, Russia is dealing with a huge drought. The
drought is impacting one of the biggest wheat growing areas in the
world. As a result, Russia announced it was going to freeze its wheat
exports for the rest of the year.
Let me repeat… one of the world’s largest wheat producers is not
exporting wheat for the rest of 2010.
Wheat prices skyrocketed. They hit a high of nearly $8.50 a bushel in
early August.
It was beginning to seem like we were going to experience the 2008 food
crisis all over again. The world was already dealing with a production
shortfall in some wheat growing regions. And then news of the drought
hit the wire.
But, here’s the thing…
Fundamentals can change at the drop of a hat. You wouldn’t believe how
fast market sentiment can change until you see it firsthand.
A few weeks after the drought story hit, the market started second
guessing itself. The game changed. Out of nowhere, the market decided the
Russian drought may not be as bad as expected. The freeze on exports
could be lifted before the end of 2010.
By the end of August, the price had plunged back down into the mid $6.00
range. And then we hit a period of calm. It seemed like the wheat market
was getting a much needed break in the action.
But guess what... the fundamentals just changed again!
Wheat supply concerns are back in the news. The Russian export ban has
been extended into 2011. And just last week, prices took off. They’re
back well above $7.00. Unbelievable!
Look, I’m not going to recommend you trade commodities futures today.
But it’s sure fun to watch the markets at work. Of course, if you’re
looking for an extreme trading experience, look no further than wheat
futures. Just be prepared for a wild ride.
No new
offerings to report this week in the IPO market. One of the top
IPOs from earlier in the summer, CBOE (CBOE), had a
rough month of August. It closed the month at just under $21.
That’s a 28% loss from the offer price of $29.
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