In the wake of global disruptions, including the Russia-Ukraine conflict, the investment landscape for essential commodities like wheat has drawn renewed attention. While direct engagement with agricultural futures presents significant challenges for many investors, the advent of Exchange Traded Funds (ETFs) has democratized access to this vital market. Sal Gilbertie, founder, CEO, and Chief Investment Officer of Teucrium Trading, a firm known for creating commodity-based ETFs, recently discussed how products like the Teucrium Wheat Fund (WEAT) address the complexities of investing in this fundamental staple.
Demystifying Commodity Investing
For investors seeking exposure to a core food staple as a geopolitical hedge, an inflation offset, or simply a portfolio diversifier, wheat offers a compelling case. However, as Barry Ritholtz, host of ‘At the Money,’ noted, gaining exposure to grains like wheat traditionally involves futures contracts, which carry a distinct and often higher risk profile compared to stocks or bonds. Gilbertie, an old-school commodity trader since 1982, recognized this barrier.
“Futures of any kind are tough to trade, right? You’ve gotta have a margin account. They’re volatile. It requires a different expertise,” Gilbertie explained. His firm, Teucrium, founded in 2009, aimed to solve this by packaging commodity exposure within ETFs. “Anybody can buy these things in their stock account. That’s amazing,” he stated, highlighting the accessibility of the Teucrium Wheat Fund (WEAT) without the need for a margin account.
The WEAT fund is designed to track wheat prices through wheat futures, aiming to move in tandem with the underlying commodity’s price fluctuations, less fees and expenses. This structure allows investors to participate in the wheat market with the familiarity of a traditional stock account.
Wheat’s Enduring Significance and Market Dynamics
Gilbertie emphasized wheat’s profound importance, noting that “wheat is a more political commodity than oil” and is mentioned “50 or 70-something times in the Bible.” He underscored its direct relevance to human life, stating, “a higher percentage of wheat is directly consumed by humans than, say, corn or soybeans, which also go to animals and fuel.” This integral role in global food security makes wheat a unique asset.
When discussing pricing, Gilbertie clarified that investors in wheat ETFs are tracking the CBOT (Chicago Board of Trade) futures price, which serves as the “global standard” for soft red winter wheat. This differs from the cash price of physical wheat, which varies by delivery location. “Every farm, every location has a different price for physical wheat; it doesn’t matter. It all gets to be a futures-equivalent price when you factor in delivery,” he explained.
The market for wheat is surprisingly diverse, encompassing varieties like hard red winter, hard red spring, soft red winter, white wheat, and durum. However, Gilbertie noted that soft red winter wheat is generally the benchmark for global prices on the CME and is commonly used for home baking, while hard wheats are more for specialty products like pasta.
Geopolitics and Export: Key Price Drivers
Despite farming advancements that have generally kept pace with demand, leading to periods where prices, such as hard red winter wheat, are forecast at levels not seen since 1957-58, wheat markets remain highly cyclical and susceptible to external shocks. Gilbertie pointed out that agricultural commodities often trade near breakeven due to subsidies, but prices can “explode higher” during events like droughts or political upheavals.
The Russia-Ukraine war provided a stark example of this volatility. The wheat ETF “doubled after the war started and has come back down to pre-war levels,” Ritholtz observed. Gilbertie attributed this surge to the critical role of Black Sea exports. “What matters to the price of wheat is how much is available for export,” he stressed.
He highlighted key exporting nations and regions:
- Russia: Number one exporter by far.
- EU: A significant bloc exporter.
- Ukraine: Among the top five global wheat exporters.
- Australia: An “enormous exporter,” with past droughts driving record-high prices.
Conversely, while India is believed to be the number one grower of wheat globally, it does not export a significant amount. This distinction between production volume and export capacity is crucial for understanding global wheat price movements.
The investment case for wheat, therefore, extends beyond simple supply and demand. It is deeply intertwined with geopolitical stability, climate patterns, and global trade flows. While ETFs like WEAT offer a streamlined pathway for investors to gain exposure, understanding these complex underlying drivers remains paramount for navigating this essential and often volatile commodity market.
