In early March, just days after Russia invaded Ukraine, a strange thing happened in the market for wheat futures: Trading came to an unexpected halt.
Prices of wheat had spiked soon after the war started. That made sense, since Russia and Ukraine together account for about 30 percent of the world’s wheat exports and a conflict would probably cause shortages. But professional traders who speculate on the direction of wheat prices using so-called futures contracts, and businesses that use those contracts to lock in prices for the grain, couldn’t figure out why the price of one of the most popular contracts had shot up so suddenly that it prevented them from trading.
For five days beginning on March 1, the Chicago wheat futures contract for May — the nearest month that could be used to bet on the future price of wheat without the risk of having to accept a shipment of the grain — was at “limit up,” meaning that its price could go no higher for the day. For part or all of those days, no one could trade it; no one was willing to buy contracts at prices lower than the limit.
As analysts and traders tried to figure out what was going on, a small exchange-traded fund that had caught the attention of individual investors — many of whom congregate on Reddit — provided a clue.
The Teucrium Wheat Fund, whose shares trade on Nasdaq much like a stock, had witnessed a more than fivefold increase in trading volume beginning in March. Created in September 2011 by Teucrium, a company that offers several agricultural E.T.F.s, the wheat fund had been set up to buy only Chicago contracts using money raised from investors. Since most retail investors don’t trade commodities directly because they are more complicated and expensive, E.T.F.s like Teucrium are an easy way for them to make bets on the direction of commodity prices.
Could small investors, piling into the Teucrium fund as a way to play the wheat market, have caused demand for Chicago May contracts to shoot up so suddenly that trading had to be halted?
Some commodities analysts think so.
Harvesting wheat outside Kyiv in 2020. Ukraine and Russia together account for more than a quarter of the world’s wheat exports.Credit…Valentyn Ogirenko/Reuters
“There is a wheat whale, and it is the retail investor,” said Boyd Brooks, a partner at Consus, an agriculture advisory firm. He said it reminded him of when retail investors banded together on Reddit last year to hoard shares of so-called meme stocks.
Mr. Brooks pointed to the sudden jump in Teucrium’s shares and trading volume as evidence. Shares of the E.T.F. had been turning over at a daily volume of 300,000 to 500,000 for months. On March 4, their daily trading volume hit 27 million shares. That day, the fund took in $183 million; it had never before taken in more than $35 million in a single day. Its price, which was just over $8 on Feb. 25, peaked at $12.28 on March 7.
“We saw that huge run-up because it was a GameStop or an AMC,” Mr. Brooks said, referring to two meme stocks.
The huge demand caused problems. Exchange-traded funds are required to register their shares with the Securities and Exchange Commission, and to seek permission from the agency to issue new shares when demand exceeds supply. For several days in March, as new money kept pouring into the Teucrium wheat E.T.F., it began to buy up more and more Chicago contracts. Less than an hour after the market opened on March 7, the E.T.F. ran out of shares to sell and had to halt trading briefly while it waited for the S.E.C. to grant it permission to create more.
Mr. Brooks posited that the heavy demand from retail investors, via the Teucrium E.T.F., had led not only to the fund’s own shares being halted, but also to the “limit up” on Chicago May futures contracts.
Others aren’t so sure.
Jake Hanley, a managing director and senior portfolio strategist at Teucrium, said it was “unlikely” that the E.T.F.’s hunger for wheat futures — or trades by any other single entity, for that matter — caused the Chicago contracts to lock up. He pointed out that on March 4, Teucrium’s activity in Chicago May wheat futures accounted for less than 3 percent of the May contracts traded that day.
“Was it one whale or not?” Mr. Hanley mused. “My instincts tell me it was just the markets reacting to the headline news,” he said. “I don’t think it was anybody in particular.”
The Russia-Ukraine War and the Global Economy
Rising concerns. Russia’s invasion on Ukraine has had a ripple effect across the globe, adding to the stock market’s woes. The conflict has already caused dizzying spikes in energy prices and is causing Europe to raise its military spending.
The cost of energy. Oil prices already were the highest since 2014, and they have continued to rise since the invasion. Russia is the third-largest producer of oil, so more price increases are inevitable.
Gas supplies. Europe gets nearly 40 percent of its natural gas from Russia, and it is likely to be walloped with higher heating bills. Natural gas reserves are running low, and European leaders worry that Moscow could cut flows in response to the region’s support of Ukraine.
Food prices. Russia is the world’s largest supplier of wheat; together, it and Ukraine account for nearly a quarter of total global exports. Countries like Egypt, which relies heavily on Russian wheat imports, are already looking for alternative suppliers.
Shortages of essential metals. The price of palladium, used in automotive exhaust systems and mobile phones, has been soaring amid fears that Russia, the world’s largest exporter of the metal, could be cut off from global markets. The price of nickel, another key Russian export, has also been rising.
Financial turmoil. Global banks are bracing for the effects of sanctions intended to restrict Russia’s access to foreign capital and limit its ability to process payments in dollars, euros and other currencies crucial for trade. Banks are also on alert for retaliatory cyberattacks by Russia.
Global wheat markets experienced a lot of volatility after Russia invaded Ukraine because of worries about the supply of wheat, said Dana Schmidt, a spokeswoman for the Chicago Mercantile Exchange, where the contracts are traded. But Ms. Schmidt declined to comment on what caused the contract prices to keep hitting their daily limit. (The exchange also sets the bar for how high the price of a contract can go up in a day.) She said the wheat markets were working “as designed.”
Still, it’s undeniable that retail investors played a role.
Amateur investors, many of whom embraced trading during the pandemic, have emerged as a force in the markets. Many of them gather on Reddit message boards to discuss trading tips and strategies. Early last month, the Teucrium wheat E.T.F. became a trending topic.
On March 7, a Reddit user with the handle “quarantrader” suggested that the E.T.F.’s price, which that day would reach its peak, could go much higher. The author of the post argued that the conflict in Ukraine would keep global wheat prices high for a long time. “I wouldn’t be surprised if we hit at least $20. If you told me $40 by July I wouldn’t even blink.”
The next day, another user, TerabyteFury, observed that “Wheat,” as a whole, was “trading at all time high prices, and is experiencing a large amount of retail volume from people like us.”
Whether or not a surge of retail money into the Teucrium E.T.F. caused the Chicago contracts to lock up, there’s no doubt that the E.T.F.’s popularity has soared. On March 9, the S.E.C. gave Teucrium permission to create more shares. It is now authorized to add an indefinite number without first seeking the S.E.C.’s blessing.
The run-up in futures prices on the Chicago Mercantile Exchange stopped after wheat prices began falling in other regions. But the daily trading volume for the Teucrium E.T.F. since the price spike has oscillated between a high of just under 10 million shares on March 17 and a low of under two million on Monday.
Andrey Sizov, a grain analyst based in Russia, said in an interview that the Teucrium buying frenzy was merely one element of a much bigger picture — one where speculative investors, like hedge funds, that had placed bets that wheat prices would fall were caught off-guard by the war and scrambled to buy new futures contracts to minimize their losses.
But Mr. Sizov added that the fireworks in early March served a useful purpose. Much of the bad news that could emerge in the next few months about Ukraine’s ability to export wheat is probably already accounted for in wheat prices, he said. What’s more, the initial spike in prices has led the United States and other governments to begin planning for how to accommodate what is likely to be a sharp drop in the supply of wheat coming from Ukraine this year.
“It’s not really that bad as it could look like if you only read the headlines,” Mr. Sizov said.
