Up 12% in May, Is This Wheat ETF Overbought?

Wheat holds significant importance as an agricultural commodity, serving various purposes throughout the global economy, including food production, animal feed, fuel, starch, paper manufacturing, particleboard production, and plastic production. Demand for wheat is experiencing exponential growth, driven by the increasing world population and the expansion of the global middle class.

Wheat prices exhibit a historically low correlation with U.S. equities, which makes investing in this commodity a potentially appealing choice for diversifying investment portfolios. Investors seeking exposure to wheat futures prices may want to explore a promising wheat exchange-traded fund (ETF), namely the Teucrium Wheat Fund (WEAT).

After a period of extended underperformance, WEAT has experienced a sharp rally in tandem with wheat futures (ZWN24). But after a remarkable 12.5% surge in May, the question arises: is the Teucrium Wheat ETF overbought?

Let’s have a closer look.

Why Invest In Wheat?

Wheat, soybeans, and corn, among other agricultural commodities, serve as crucial food staples globally and represent significant investment opportunities. Wheat undergoes milling to produce flour, a key ingredient in staple food items like bread, pasta, baked goods, and breakfast cereals. As arguably the most crucial food crop globally, it serves as a primary source of carbohydrates and protein for a significant portion of the world’s population.

Several types of wheat exist, including hard red winter wheat, hard red spring wheat, soft red winter wheat, white wheat, and durum wheat. Each variety possesses unique qualities suited for different food products, such as flour, bread, or pasta.

Key factors affecting wheat prices include weather conditions in major growing regions, global stock levels, geopolitical events like conflicts and export bans, and shifts in consumption patterns. As a result, wheat prices are certainly not immune to volatility. For example, adverse weather conditions such as droughts or excessive rainfall can drastically lower yields and increase prices. Additionally, the start of the war between Ukraine and Russia two years ago constrained the wheat supply, leading to increased prices.

Investors and traders engage in grain markets to diversify their portfolios, hedge against risks, or speculate on market trends. These “soft” commodities provide diversification benefits, since they do not correlate with stock and bond market fluctuations. Consequently, investing in them can serve as a hedge against inflation, as tangible assets like commodities tend to retain their value during economic uncertainty.

About WEAT 

One quality ETF that provides investors with an easy way to gain exposure to the price of wheat futures is the Teucrium Wheat Fund (WEAT). WEAT is designed to track the daily percentage fluctuations of an average of the closing settlement prices for three wheat futures contracts traded on the Chicago Board of Trade. Unlike mutual funds, WEAT generally does not distribute dividends to its shareholders.

The primary holdings of WEAT consist of wheat futures contracts. The top five individual positions of the fund predominantly revolve around three actively traded CBOT wheat futures contracts: the second-to-expire CBOT Wheat Futures Contract, weighted at 35%; the third-to-expire CBOT Wheat Futures Contract, weighted at 30%; and the CBOT Wheat Futures Contract expiring in December following the expiration of the third-to-expire contract, weighted at 35%.

WEAT is actively traded, with an average daily trading volume of approximately 718,000 shares over the past 3 months, and assets under management exceeding $168 million, accompanied by an expense ratio of 0.19%.

Why Is WEAT Outperforming?

Shares of WEAT have gained more than 12% since the start of May, while the broader S&P 500 Index ($SPX) has advanced about 4.6% over the same period. Not only is WEAT surpassing the broader equities market this month, but it is also outperforming the returns of the S&P 500 Tech Sector SPDR (XLK), which is up 9.4% since May began.

Chicago wheat futures surged on Tuesday to their highest level since last July amid concerns that adverse weather conditions in Russia, a leading exporter, are reducing yields and tightening global supply. July CBOT soft red winter wheat futures climbed to a peak of 720-0 per bushel before retracting most of their gains. 

Wheat futures dipped on Wednesday as investors opted to take profits following the recent surge. Nevertheless, prices have surged by over 32% from a 3-1/2-year low of $5.24 per bushel in March, a period during which Russia was exporting record amounts of grain and seemed poised for another robust harvest this year.

Dry weather and severe frosts have impacted crop-growing areas in southern Russia, with minimal rainfall predicted. Conversely, Siberia has experienced excessive rainfall, resulting in waterlogged soil.

Consultants IKAR on Monday significantly reduced their forecast for Russian wheat production to 81.5 million metric tons and exports to 44 million tons. Just one month ago, IKAR predicted production at 93 million tons and exports at 52 million tons.

Additionally, approximately 1.5 million hectares of Russian crops have suffered frost damage, with the potential for the total affected area to increase to 2 million hectares, as stated by the head of Russia's Grain Union.

Meanwhile, Ukrainian drones targeted the Russian grain export port of Novorossiysk on May 17, resulting in minimal damage. AgResource said in a note that “Ukraine appears to be targeting strategic economic targets within Russia, which now includes ag trade.”

Options Market Sentiment on WEAT Stock

Analyzing the option chain for WEAT on June 21, 2024, we can gauge market sentiment through a comparison of open interest levels.

At the $6.50 strike price, nearest to the current share price, the put-call ratio stands at 1.65x, signaling a heightened preference for put options. However, at the subsequent strike price of $7.00, the put-call ratio sits at 0.11x, indicating a robust bullish sentiment.

The Bottom Line on WEAT Right Now

While predicting the price trajectory of wheat is notoriously challenging due to the numerous variables at play, investors aiming to gain exposure to agriculture or bolster portfolio diversification may find WEAT to be an attractive choice.

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