Bullish Wheat Forecast: Hungry for WEAT


This article was written by Cole Winston, a Financial Analyst at I Know First.

Bullish Wheat Forecast


  • Wheat Fundamentals
  • Teucrium Wheat Fund (NYSE: WEAT)
  • Price Action
  • Bullish Forecast

Wheat Fundamentals

As a major cereal grain, Wheat is a central and essential fulcrum to the international food supply chains. To emphasize just how widespread and essential wheat is to the diets of citizens everywhere, wheat can be found in food products as diverse as bread, porridge, crackers, biscuits, pancakes, pies, pastries, cakes, cookies, muffins, rolls, doughnuts, gravy, beer, vodka, and breakfast cereals. Suffice is to say that wheat can be found virtually everywhere. It is clear that wheat is a major staple in many food items. Therefore, there exist two main fundamental drivers that will drive bullish price action in wheat over the short-, mid-, and long-term horizons. As an aside, now is an appropriate time to highlight that commodities in general, one of which are wheat, are much more sensitive to supply and demand than other assets necessarily are.

Firstly is the recent strong bumper crop yields that have manifested over the past few years of the agricultural cycle. The most recent round of wheat harvests have generated crop that has exceeded expectations in both quantity and quality, known as a “bumper” crop. This massive oversupply that has been created over the last few harvesting cycles has unquestionably shown up in the price action of wheat and wheat-linked assets, reflected in the extreme downward price movement over this time period.

This bumper crop, undeniably a positive development, is not without its faults, nevertheless. Although a widespread availability of wheat is great news in regards to food consumption, a consequence of this extra yield has been the complacency that farmers and others along the wheat supply chain have developed as they have gotten used to this overproduction capacity. As with any market, the complacency of market participants often evolves into mass panic and even crisis when the good times take a turn for the worse. Therefore, when the next round of harvests don’t turn out to be as fruitful as recent history has dictated, there is going to be a shortage of wheat on an international scale, creating upward pricing pressure over the next little while.

Second is the ever-growing threat of climate risk. Climate risk is the risk that results from climate change and affecting natural and human systems and regions. Weather is an inherent uncertainty, but it is known that weather and climate conditions today are much more extreme and volatile, historically-speaking. This fast-changing climate is predicted to pose a serious issue for the production of agricultural crops, including wheat. If climate risk materializes and prevents a continuation of the bumper crops of the recent past, this too will cause wheat prices to sky-rocket as less and less of it is flowing around the world.

Third is rapidly growing world population. The world human population grows annually at an approximate 1.1% growth rate. Over a little more than 200 years, from 1800 to April 2017, the global population grew from 1 billion to 7.5 billion; an eye-popping 650% increase. Given that natural resources like wheat are in finite supply, the most pressing concern from the above figures becomes world overpopulation causing wide scale shortages of key resources. It is not the purpose of this article to say that this is what will happen. It is simply to highlight that fast-approaching population demands for wheat globally will catalyze the upwards price pressure on wheat at these figures continue to expand.

Together, these three factors are likely to cause a shortage in global wheat availability in the near future. This will undoubtedly be a major driving force behind renewed bullish sentiment in the price action of wheat assets everywhere. The last time something like this happened was roughly five years ago. The result was that agricultural product prices rallied, especially wheat. As the great Mark Twain quipped: “History doesn’t repeat itself, but it often rhymes.”

Teucrium Wheat Fund (NYSE: WEAT)

Given the above analysis, what then becomes the best asset to capitalize on future bullish performance in wheat? When a market participant desires exposure to commodities, there are several ways in which to achieve this exposure. One can trade or invest in physical commodities, the debt and/or equity of companies operating in the commodities space, commodity futures, commodity mutual funds or commodity ETFs. Commodity ETFs are usually the simplest and the cheapest option, as they invest in physical commodities and/or commodity futures contracts so that the market participant is freed from the intensive research required to do this on one’s own.

One particular wheat ETF that attracts our attention and that is covered by the I Know First algorithms the Teucrium Wheat Fund (NYSE: WEAT), formed on September 19th, 2011. WEAT is a relatively small commodity pool traded on the NYSE Arca with $65.7 million in assets under management (AUM), which trades wheat futures. WEAT is currently trading at a Net Asset Value (NAV) of $7.71, or at a 0.26% premium. The two main reasons for the attraction to WEAT are its design and its price action (outlined in the next section).

The fund is designed to specifically mitigate the impacts of contango (spot prices lower than futures prices, yielding a upward-sloping contract term structure) and backwardation (spot prices greater than futures prices, yielding an downward-sloping contract term structure). The objective is “to have the daily changes in percentage terms of the Shares’ net asset value (NAV) reflect the daily changes in percentage terms of a weighted average of the closing settlement prices for three futures contracts for wheat that are traded on the Chicago Board of Trade (“CBOT”).” Ultimately, this fund is interesting to look at as it aims to protect its investors from changes in the term structure of wheat futures, to focus solely on price changes.

Price Action

As demonstrated below*, the price history of the WEAT fund (and wheat in general) reflects the above fundamental analysis. It is interesting to note two different components of these charts. First is the extremely bearish price action that has occur over the past few years, as outlined above for reasons of intense over-production and overabundance of the cereal grains. Second is the very recent bullish price action that has been developing. Although this is a fairly new development, it is likely the beginning of a secular change in the commodity super-cycle and the wheat harvest, which is likely to persist moving forward.

*Chart Guide: white candles represent the close being higher than the open (an up candle), black candles represent the open being higher than the close (a down candle), the top chart represents monthly candles, the middle chart represents weekly candles, the bottom chart represents daily candles, and the price data is sourced from BATS (an electronic exchange platform).

Bullish Forecast


The I Know First algorithm is bullish on WEAT over a 1-month, 3-month, and 1-year time horizon. In light of the recent poor performance of WEAT shares, WEAT is currently being predicted by the I Know First algorithm to generate bullish returns once the building shortages in the wheat market manifests and becomes recognized by market participants globally.

I Know First Algorithm Heatmap Explanation

The sign of the signal tells in which direction the asset price is expected to go (positive = to go up = Long, negative = to drop = Short position), the signal strength is related to the magnitude of the expected return and is used for ranking purposes of the investment opportunities.

Predictability is the actual fitness function being optimized every day, and can be simplified explained as the correlation based quality measure of the signal. This is a unique indicator of the I Know First algorithm, allowing the user to separate and focus on the most predictable assets according to the algorithm. Ranging between -1 and 1, one should focus on predictability levels significantly above in order to fill confident about/trust the signal.



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