I hope you've had your Wheaties...

As a brief addendum to the recent portfolio update, one thing I failed to mention as part of my willingness to carry the extra put exposure is Wheat.  It’s not normally something I look at, but the recent news and moves on wheat are certainly worth considering...

The long-term bull story for Agricultural products is very well known, and relatively simple – world population is growing rapidly (see graph below) and hence both demand and expected future demand for grains/food are rising.  Historically, technological advancements such as dwarf wheat (for which the late Norman Burlaugh won a Nobel Prize) along with other genetic modifications to crops (e.g. to be able to resist pesticides, etc) have helped supply keep pace, but there are signs that this is meeting headwinds and slowing.

In the short-term, a drought in Russia that has led to reduced production there and a Russian ban on wheat exports has caused a big spike in Wheat prices (n.b. remember this when we see future headline inflation numbers).  What’s interesting, in the longer-term, is this spike has caused prices to break out from the large base that has formed since late-2008.

If this current drought’s impact on prices proves to be a temporary (which it should) then wheat’s likely to fall back to that base.  For the technicians amongst you, that could form a bullish flag or a rising wedge, which would be the time to buy for the long-term.  If this was accompanied by a change in the global wheat stocks to usage ratio (i.e. there were signs of a shortage of wheat) in addition to the long-term bull story then things might getting really interesting!

However, as the graph above shows, we’re clearly not there yet.  Nonetheless, while it’s something that’s hard to execute efficiently (GRU - appears the best bet, and even it is <50% direct exposure wheat) for those (like me) who don’t have a commodities account, it’s definitely something to keep in the back of your mind as with the charts as well and long-term/short-term fundamentals threatening to line up it could prove spectacular!