A Wild Ride for the Wheat ETF

Fundamental factors have sent the Teucrium Wheat Fund (NYSEArca: WEAT) higher 5.7% this week, but the exchange traded fund’s chart portends a breakout and more upside ahead.

Although WEAT is off half a percent today, the fund is up 2.5% over the past month. WEAT “has a commodity-specific benchmark designed to reduce the cost of rolling the investment when compared to funds that hold only a single month,” according to Teucrium. “As a result of the CBOT wheat futures contracts it holds, has been specifically designed to mitigate situations which are commonly referred to as ‘contango’ and ‘backwardation.’”

WEAT surged yesterday on reports that a savage drought in South Africa has reduced that country’s wheat crops to the lowest levels in eight years, reports Bloomberg.

“Wheat farmers planted the grain on 476,570 hectares in 2014, the smallest area in more than 80 years and 76 percent below the 1989 peak, South African Grain Information Service data show. They will probably sow the cereal over 481,300 hectares in 2015, the Pretoria-based Crop Estimates Committee said in April. South Africa imports about 55 percent of the wheat it needs for food production,” according to Bloomberg.

Short-covering is also stoking wheat futures and, as a result, WEAT, higher. As Chris Kimble of Kimble Charting Solutions notes in the chart below, long wheat is far from being a crowded trade. Many professional traders have been caught off guard by the rally in wheat.

“Hedge funds as of last week held a record net short in soft red winter wheat futures and options in Chicago, the world bellwether, leaving that market and others worldwide vulnerable to a short covering-fuelled jump in prices,” according to AgriMoney.com.