The Strategist

New wheat futures at CME unexpectedly became popular

05/02/2018 - 05:57

The transformation of the region of Black Sea into a large grain exporter boosted popularity of futures contract for wheat from the Black Sea region, which the Chicago Mercantile Exchange (CME) offered in November 2017. New derivatives are rare for such a long-standing and large market (the world benchmark is contract for Chicago wheat, circulating more than 140 years). The first attempt to start trading futures on the Black Sea wheat in Chicago in 2012 was unsuccessful. Yet, the new tool attracted attention of companies trading in Russian and Ukrainian grain, as well as hedge funds.

Charles Knowles
Charles Knowles
Russia has overtaken the US and became the leading exporter of wheat in the 2015/16 agricultural year (lasts from July to June), according to the US Department of Agriculture. Then the country dropped to 2nd place, but this year it will again become a leader and will take more than 20% of the world market, the department predicts. "[Growth] exports and production in Russia is striking," says INTL FCStone's Matt Ammermann.

Previously, the Black Sea region, where grain traders include Russia, Ukraine and Kazakhstan, did not have a popular derivative for wheat. But now positions for the September futures exceed 20% of Russian wheat exports this month, when the main supplies of the new crop begin. The value of the contract is determined based on the prices of wheat in the port of Novorossiysk from the market information provider S&P Global Platts. The futures hedge companies engaged in physical supplies, and has already been noticed by financial players, which increases liquidity. Since these are cash-settled futures, hedge funds, if they hold the contract before expiry of the term, do not need to deliver the goods.

"A lot of funds have come to [the market] in just a few months," notes Swithun Still of Solaris Commodities, which sells large quantities of wheat through Novorossiysk. According to him, Citadel, the Chicago hedge fund managing assets of $ 28 billion, began to actively trade these futures and increasing liquidity: "This gave a real boost to the market."

CME deals with clearing, which reduces the risk for counterparties. They also allow traders to benefit from the difference in prices for contracts for American and European wheat. Sebastian Barrak of Citadel said in March that the Black Sea market is "very interesting" for his fund. "One of our favorite activities is monitoring price differences in different regions of the world. Therefore, it is obvious that the Black Sea contract is very useful for us to trade between the regions," Barrak said.

So far, the new contract is much inferior in popularity to American and European wheat. A month ago, there were 12,220 lots opened for the Black Sea futures positions, which are equal to to 611,000 tons. This is approximately 1% of the turnover in the Chicago wheat trade at the CME. In addition, there is a big difference between the prices of supply and demand: $ 1 to $ 4 (a quarter of a cent for Chicago wheat).

Nevertheless, CME Executive Director Jeffry Kuijpers believes that the growing importance of the Black Sea region contributes to success of the new instrument: "The growth of wheat production there in recent years has provided a possibiliy to create a regionally relevant price benchmark."