Spread betting on Wheat
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The week ended strongly in the commodities market. After Wheat prices increased by 30% in America in August, wheat has continued to lead the way. High import demands and queries over supply have lifted prices to an all time high.
Rising prices at home, forthcoming elections and low stock levels have led to Moscow threatening to introduce a new export tariff and even put a ban on Wheat Exports.
Today's Financial Times said that 'talk of the export ban led to panic buying from countries such as India and Egypt on top of the high demand from the emerging markets which have led to the lowest global wheat inventories in 26 years'.
With Russia and the Ukraine being the fifth and sixth largest Wheat exporters supply fears could get worse. The Ukraine has already introduced a cereal export tariff (June 07).
On top of the high demand 'the Australian, Canadian and European crops have all been hit by bad weather'.
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How to spread bet on Wheat
At the time of publication the Wheat December price is valued at $7.82 - $7.84 with FinancialSpreads.com.
As with many commodities markets you can spread bet on the Wheat price increasing in value to more than $7.84 by 21-Nov-07 ie spread trading on the 'Wheat December' market.
Note that for the Wheat price, you trade in £X per $0.01 of Wheat movement or £X per cent. eg if your stake was £10 per US Cent of price movement and the Wheat prices moved $0.04 or 4 Cents then that would be an £40 difference to your P&L.
For example, let's say you check the quote on an online spread betting service and it shows a live price of $7.82 - $7.84 and you like the price and think that the Wheat December value looks like it will rise above $7.84.
Therefore you buy at $7.84 for a stake of £5 per point.
If by the closing date of 21-Nov-07 the Wheat December price settles at $8.00. Then your profits is worked out by taking the difference between the settlement value, ie $8.00 and the price you made the spread bet at, ie $7.84 and then multiplying that by the stake per point.
Profit/Loss = (($8.00 - $7.84) / 0.01) x £5 per point stake.
= (0.16 / 0.01) x £5 per point stake.
= £80 profit.
But if, for example, Russia doesn't introduce a tariff and the panic buying stops then the Wheat December market could fall to lets say $7.76. If so, you would have made a loss rather than a profit.
Loss = (($7.76 - $7.84) / 0.01) x £5 per point stake.
= (-0.08 / 0.01) x £5 per point stake.
= -£40 loss.
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Risk Warning: Spread betting carries a high level of risk to your capital. You may lose more than your initial investment. It may not be suitable for all investors. Only speculate with money that you can afford to lose. Please ensure you fully understand the risks involved and seek independent financial advice where necessary.
'Spread Betting on Wheat' by DB, updated 03-Sep-07
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