Wheat Futures Contract
The CME (Chicago Mercantile Exchange) Wheat futures contract, reflects the price of soft red winter wheat delivered to regulated CME warehouses throughout the United States. Wheat is physically delivered in a number location throughout the mid-west of the United States. You can find the delivery points which are listed on the Chicago Mercantile Exchange’s web site. The grade that can be used has several differentials, which trade as a discount of flat to the benchmark. CME wheat is different from the wheat trade on the Kansas City Board of Trade, which is hard red winter wheat.
Overview
The Chicago Mercantile Exchange Wheat futures contract trades in cents per bushel and there are 5,000 bushels, which is equivalent to 136 metric tons, for each Globex CME futures contract. The minimum price increment is ¼ of a $0.01 which equates to $12.50 per contract. The contract trades Sunday – Friday, 7:00 p.m. – 7:45 a.m. CT and Monday – Friday, 8:30 a.m. – 1:20 p.m. CT. Daily settlement of the futures contract is determined by CME staff.
There are three grades of wheat that can be delivered on settlement of the contract. These include:
- #2 Soft Red Winter at contract price
- #1 Soft Red Winter at a 3-cent premium
- or deliverable grades listed in Rule 14104
The futures contract is traded in for deliver in, March (H), May (K), July (N), September (U) & December (Z). Liquidity which is reflected by the open interest in the contracts available is approximately 1-year. This means that you will be able to get in and out of your positions without substantial slippage in trades of one year or less.
As opposed to other types of grains, such as corn and soybeans, the CME wheat futures contract is a non-genetically modified strain. This means that the wheat that is planted is not from a roundup ready seed. Roundup is a chemical that kills weeds and pets, and is commonly used in planting process of other grains.
How to Trade
There are six different types of wheat that are traded in the United States. Hard wheat contains robust levels of protein and glutens and are used in yeast breads and rolls. Soft wheats are generally low on protein values and are used in soft products such as cookies and cakes.
The wheat that is traded on the Chicago Mercantile Exchange is soft red winter and there is also soft white wheat. Soft red winter has a low protein content and is used to blend into all-purpose flour which is commonly used to bake cake and cookies, and soft breads such as pitas.
Winter wheats are strains of wheat that are planted during the autumn and are harvested in early spring. Most red winter wheat is planted east of the Mississippi. The wheat contract is used for speculation as well as, hedging purposes. Farmers and commercials use the CME wheat futures contracts to lock in prices prior to planting and during the harvest season. The price of wheat is generally more of a function of supply rather than demand.
The supply of wheat is estimated by the US Department of Agriculture. During the planting season and into the harvest season, the USDA issues reports on the estimate crop size in terms of bushels as well as acreage. The carry over into the following years crop is also monitored carefully.
Demand can be monitored through wheat exports. The United States is one of the largest wheat producers in the world, first in export volume as the country exports more than 50% of its harvest. By monitoring export volumes, you can attain an understanding of wheat demand.
Like with other crop commodities such as corn and sugar, the weather can effect grade and yield and should be considered by traders.
