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CME in Black Sea wheat futures 'for the long run'

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You can't fault CME Group for its timing in its launch of Black Sea wheat futures.

Grain markets have been very much in investors' sights since the group last month realised long-held plans for contracts covering a Romania, Russia and Ukraine region which, while having emerged as a key source of physical supplies, has been tricky to gain exposure to through derivatives.

And, for wheat, a primary reason for price jumps of 15% last month in the Chicago market, which CME Group operates, besides gains of 7-8% on Paris and Sydney exchanges run by rivals, has been concerns over dry weather in southern Ukraine and Russia.

Monday continued the run of downgrades to the Russian wheat crop, with Ikar reducing its estimate by 2.0m tonnes to 48.5m tonnes, putting it closer to 2010's drought-hit harvest than last year's bumper crop.

Yet, the activity has not been reflected on CME Group's Black Sea wheat futures, which have not registered any trades since their second day of dealing, on June 7, when five deals were done in the September contract.

'Marathon, not a sprint'

Isn't that a worry?

"We always said this would be a marathon, not a sprint," Jeffry Kuijpers, the CME Group executive director of commodities for Europe, the Middle East and Africa, said.

"There are some contracts which start trading straight away. But often contracts take years and years to develop.

"We are in this for the long run," he said, adding that the group was engaged in an education programme in the region, in Bulgaria, Kazakhstan and Ukraine, besides in the North Africa and Middle Eastern areas in which major buyers are based.

Two continents

Indeed, one of the concerns lodged by critics over the contract is its geographic diversity, with it covering supplies sourced from an area extending from Romania in the east of the European Union to Kazakhstan, some 2,000 miles away.

That is a spread over two different continents, besides different legal regimes and cultures.

However, CME Group's research in the run-up to launch, after focusing initially on Ukraine, had stirred up interest from Russia, Bulgaria and Romania too.

"We got calls from other countries too from people saying they wanted to hedge, but lacked the opportunity the way the contract was originally set up," Mr Kuijpers said.

Quality range

But even if simple geography is not a problem, what about the range of different wheat standards produced within the region?

Kazakhstan, for instance, is overwhelmingly a producer of higher protein spring wheat, while Ukraine is largely a grower of winter wheat for feed use.

Mr Kuijpers was not averse to the potential launch in the future of different feed and milling contracts, "if the demand is there".

But even the existing contract "can still be used as a pricing tool", a benchmark against which higher grades can be priced against, with a premium for quality, and discount for lower-grade supplies.

Delivery vs risk management

After all, setting guideline prices, for wheat from a region where values can be poorly correlated with those in Chicago, the world benchmark grains market, or Paris, the European standard run by NYSE Euronext, is a major role for the contract.

"We offer a futures contract for people to manage risk," Mr Kuijpers said.

Sure, "the contract needs to be deliverable". And, indeed, the specifications been tested last month in a delivery in Ukraine, which had been channelled through CME systems to ensure they could handle physical transactions.

"The contract is there to be delivered against, but that is not first and foremost its goal."

Canada plans

CME Group is taking this philosophy to Canada too.

Rather than following rival Ice in setting up a new contract for the high quality spring wheat from a country where wheat marketing is being liberalised as of next month, the company is pressing the advantages of its existing, well-traded soft red winter wheat contract as a proxy.

"You can set up a new contract for different quality wheat, but the market tends to head towards liquidity, as long as you are seeing a correlation.

"We have the most liquid futures contract."

The group's US team has a "specific programme" for Canadian customers, "looking at their needs and wants, education them and looking at opportunities together.

"A lot of Canadian customers already use our market."

'Luxury problem'

Of course, this is pitching it head to head again with Ice, whose move into electronically-traded grains contracts, based on CME's benchmark lots for the likes of corn, soybeans and wheat, has revolutionised the trading day.

Chicago has extended its electronic dealing hours to 21 hours a day, and prolonged pit trading too, so as not to be trumped by Ice – a move which fluffed some traders' feathers in meaning trading is open when some market-moving crop reports are released, a factor seen as provoking volatility.

As for whether Ice launches Black Sea wheat futures too,"that's clearly a different subject", Mr Kuijpers said, noting the distance the contract still has to go to attain maturity.

"It's what you might call a luxury problem if we come up against it."


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