December 19, 2012 9:16 am

Europe’s tale of two wheat contracts

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The fortunes of Matif futures and new Black Sea contracts have split

The year has been one of the tale of two European wheat contracts – and the influence of one country: Russia.

On the one hand, the Matif milling wheat contract has had a good year. The benchmark traded on NYSE Euronext in Paris, has been building its reputation as a proxy for Black Sea wheat, and the drought in Russia and eastern Europe has helped trading volumes, say officials.

Matif wheat had already seen a 125 per cent jump in trading volumes in 2010 as traders scrambled to hedge price risk using the European benchmark after Moscow’s grain export ban that same year. Uncertainty over Russian and Ukranian exports this year have helped volumes grow almost 30 per cent again in 2012.

But the adverse weather in Russia and neighbouring countries, and the threat of government intervention has hampered trading in another European wheat contract: the CME’s new Black Sea wheat futures, launched this June.

The contract has seen sporadic activity with some weeks not seeing any trading, and the slow start was widely expected by the agricultural trading community.

But the reasons behind the new product – the brainchild of Leo Melamed, CME’s chairman emeritus – broadly make sense, even if volumes are still low.

Russia, Kazakhstan and Ukraine, collectively known as the Black Sea region in the wheat market, account for about a quarter of global exports and are key suppliers to north Africa and the Middle East, the world’s biggest cereal importers. With growing demand for grains around the world, the region’s importance can only increase, and theoretically, the contract would allow producers and consumers to lock in prices and reduce risk.

Few doubt Jeffry Kuijpers, director of agricultural commodities at CME, when he says: “Everybody involved in wheat believes that the Black Sea will be one of the leading producer regions of the world.”

However, various hurdles are preventing physical traders from using the new futures contract.

On top of the Ukrainian and Russian record of political interventions in the grains markets and the concerns about Ukrainian and Russian sellers defaulting on agreements, there is a simple lack of knowledge about futures markets among buyers and sellers in the region.

Svetlana Sinkovskaya at agricultural consultancy Apk-Inform in Kiev, says: “It’s a matter of fact that we do not have here in Black sea region, traditions of hedging and derivatives trade.”

Ukrainian limits on fund transfers are also hampering trading among those who do understand hedging.

Another factor has been that some buyers want a specific type of Black Sea wheat and do not want to go through the exchange. Amr Kassem, of Cairo based broker East Med Commodities Trading, says: “If some clients want Ukraine wheat they would just buy directly from a Ukrainian producer.”

Liquidity begets liquidity, and without much trading volumes, no financial trader is going to give it a second thought.

“You need the critical mass of physical traders,” says Mr Kuijpers.

New contracts take time to take root, as Liffe well knows. The Matif wheat contract was launched in 1998 and four years ago, was only trading an average of 5,700 lots a day, a quarter of this year’s level.

Although exchange executives and traders note the rise in arbitrage trades between the Chicago and Matif contracts over the past 18 months, in tonnage terms, average daily trading volumes for Matif wheat have yet to hit 10 per cent of the three – Chicago, Kansas City and Paris – put together. And that is without the government interventions and lack of hedging knowledge among traders and producers.

The Commodities Note is a daily online commentary on the industry from the Financial Times

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