WEAT: Little Potential For Further Growth

ETFS

Source: Goodfone

Instrument

The Teucrium Wheat Fund (WEAT) provides investors unleveraged direct exposure to wheat without the need for a futures account. Therefore, the decision to invest in this fund should be made after analyzing the wheat market.

Seasonality

The current wheat futures price is above its five-year high. Given that the seasonality now suggests a period of likely decline in the wheat price, in my opinion and in this context, wheat is a bit expensive.

Wheat-Corn Spread

Wheat is now relatively more expensive than corn and must drop by 20% to reach a reasonable level:

But at the same time, we must admit that the correlation between these commodities is decreasing. In other words, wheat and corn become less sensitive to each other.

U.S. Export

According to the USDA, as of the third week of August, the accumulated volume of exported wheat together with the outstanding sales in the U.S. amounted to 11.11 million tons. This is the highest figure for the current time of the year, which the past five years have seen. But there is no significant deviation from the five-year range:

Supply And Demand

The latest USDA forecast assumes a surplus in the world wheat market (excluding China) of 9.89 million tons. But two months ago, this figure was over 14 million tons. This creates some concern about the stability of the market balance in the current year. But again, nothing critical has yet been observed.

Specifically in the US, the situation does not change significantly.

Fundamental Price

In the corn market, as a commodity market, the price is formed on the basis of the balance between supply and demand. One of the key markers of this balance is the stock-to-use ratio. Therefore, in the long run, there is the relationship between the values of the stock-to-use ratio and the average price of the corn futures.

According to the latest USDA data, the stock-to-use ratio for the global wheat market will exceed 42% in the current season. This is a multi-year record:

Considering the stock-to-use ratio for the global wheat market, excluding China, we are also getting a record value of the stock-to-use ratio and “expensive” state of the market:

Considering the stock-to-use ratio exclusively for the U.S. market, we can say that the price of wheat futures is close to the balanced state:

Funds

Funds’ current net position on wheat (CBOT) is close to neutral. Their latest actions are also not specific.

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Bottom line

I see no reason why a strong movement in the price of wheat could now be expected. In such conditions, in my opinion, the WEAT ETF will demonstrate a sideways dynamic in the near term.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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