The Chicago Board of Trade lists two domestic wheat futures products: Kansas City Hard Red Winter Wheat (KC HRW), and Chicago Wheat (Chicago). Both products are physically deliverable, with robust and distinct underlying supplies. Underlying KC HRW futures is the national crop of hard red winter wheat (HRW), the predominant class of wheat produced in the United States. HRW is used traditionally in the production of bread, hardy baked goods, and all-purpose flour. Planted in the fall and harvested in the spring and early summer, HRW thrives after overwintering in the cold, snowy, and semi-arid plains of the Midwestern and near-Western United States.

The protein percentage of wheat responds to the growing conditions of the crop. The wheat endosperm, comprising the majority of the wheat berry’s weight, is composed of protein, carbohydrate, vitamins, and minerals. When wheat is grown in wet climates, the endosperm fattens with moisture, resulting in a higher carbohydrate-to-protein ratio. Conversely, wheat grown in dry climates have kernels that appear shriveled, with high-protein endosperm and a lower relative portion of carbohydrate.

Soft Red Winter Wheat (SRW) is the wheat class that typically underlies the Chicago futures contract (though other wheat classes are also deliverable against Chicago futures), has a softer texture due to its higher moisture content, and is used in the production of cakes, cookies, and other fine baked goods. Naturally, soft wheat is grown in wetter climates, such as in the Great Lakes and Eastern regions of the United States and has a lower protein content than does HRW. 

Figure 1: Average farm price, USDA

Chart
Source: USDA

Historically, HRW has been sold at a premium to SRW due to HRW’s versatility and higher protein content. Figure 1 shows the average annual farm price as reported by the USDA, from the 1998 to 1999 crop year to the present. Until the 2015 to 2016 crop year, HRW commanded more per bushel than SRW each year in the nearly three decades since the beginning of record. 

Figure  2: Front month KC HRW and Chicago wheat futures settlement

Figure 2: Front month KC HRW and Chicago wheat futures settlement
Source: CME Group