Rise in Russian grain exports spurs trading in new wheat contract

04.04.2018

The rise of the Black Sea region as a leading grain exporter has boosted traders’ interest in a new wheat futures contract — one of the few agricultural commodities derivatives to gain traction on the international markets of late.

CME Group’s Black Sea wheat futures contract that debuted in November last year has attracted wheat traders buying and selling the grain from Russia and Ukraine, while also catching the attention of hedge funds.

There have been plenty of failed new agricultural commodities contracts but the new Black Sea wheat contract comes as the region, especially Russia, has emerged as a key player in the wheat market, overtaking the US as the largest exporter in the 2015-16 crop year.

After falling back to second place the following year, it has regained the top spot and is set to grab a fifth of the global market in 2017-18, according to US Department of Agriculture forecasts.

“[The rise of] Russian exports and production is amazing,” said Matt Ammermann of INTL FCStone.

espite its rising presence, until now the region has lacked a successful derivative contract. Open positions in the new contract for September, one of Russia’s peak harvest months, accounted for about 12 per cent of that month’s five-year average export volumes, suggesting traders’ enthusiasm for the product.

Financial investors taking positions on their own accounts have also brought liquidity to the market.

Apart from allowing physical traders to hedge their Russian trades, the new cash-settled futures contract, based on Black Sea wheat prices from commodity pricing agency S&P Global Platts, has also attracted financial players such as hedge funds.

“Just in the last few months, the funds have got involved,” said Swithun Still, director at Solaris Commodities, a physical trader focusing on Black Sea grains (Russia and Ukraine along with Kazakhstan is referred to as the Black Sea region among grain executives).

He noted that Chicago-based hedge fund Citadel had emerged as an active trader, adding liquidity. “That has really made the market take off,” he said.

The new Black Sea contract is cleared by the CME, reducing counterparty risk. It also allows traders to exploit the price differences between US wheat futures in Chicago and Paris, home of European wheat derivatives.

Sebastian Barrack, head of commodities at Citadel, which has $28bn in assets under management, told the FT Commodities Global Summit in Lausanne last month that the Black Sea market was “very interesting for us”.

He added: “One of the things we like to do is study and monitor global arbitrage values between one region and another, so obviously the Black Sea contract is very useful for us in trading between regions.”

But even with the trading volumes from the funds, the new wheat contract is a minnow compared to that of Chicago and Paris. At the end of March, there were open positions of 12,220 lots equivalent to 611,000 tonnes in the contract, about 1 per cent that of CME’s Chicago wheat benchmark.

The difference between the bid and offer price remains wide — between $1 and $4 — compared with a quarter of a cent for Chicago wheat.

Nevertheless, it has gained acceptance among traders — unlike the CME’s first foray into Black Sea wheat derivatives. In 2012, it launched a futures contract that is now dormant.

One of the key differences is that the latest contract is cash-settled, meaning that traders can hold their positions until the contract’s expiry without having to receive or deliver truckloads of wheat.

But, ultimately, the significant presence of the region has changed the market environment, according to CME.

“Recent rises in wheat production in the Black Sea region presented the opportunity to create regionally relevant pricing benchmarks,” said Jeffry Kuijpers, executive director of CME’s agricultural commodities and Europe, Middle East and Africa.


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