New CME Wheat Contract Takes Aim at
Black Sea Breadbasket
written By Bruce Blythe
The Black Sea, according to historians, was once
known as the “Hospitable Sea” after the ancient
Greeks colonized its southern shores, setting the stage
for centuries of commerce and conflict to follow. About
3,000 years later, CME Group aims for a foothold of
its own with a futures contract based on the region’s
fertile soils and bountiful grain production.
On June 6, Chicago-based CME Group launched Black
Sea wheat futures trading on its CME Globex electronic
network, offering opportunities to hedge and speculate
in a market that’s playing an increasingly important
role in the world’s food supply.
The contract is based on food-grade wheat readily
available throughout the Black Sea region, which
accounted for about 20 percent of global wheat
exports in the 2011-12 marketing year, compared with
just 1 percent to 2 percent a decade ago.
Yet the market lacks a liquid futures contract, can be
subject to export restrictions and consistent price
information can be difficult to come by. CME Group
officials say the new contract will provide muchneeded transparency and risk-management tools,
and has potential to become a regional wheat pricing
benchmark.
“It’s an underserved market,” said Fred Seamon,
Senior Director of Commodity Research & Product
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Development with CME Group. While there are several
existing wheat futures contracts, “there is not a high
price correlation” with the Black Sea crop, Seamon
said in an interview. “There is not a good hedging tool
for participants in the market.”
With delivery locations at eight Russian or Ukrainian
ports, along with one in Romania, the contract should
have strong correlation with the region’s cash market,
CME Group has said.
Fabulous farmland, unique market risks
Producers in the Black Sea region face “a unique set
of risks” compared to their counterparts in other crop
areas, said Nick Higgins, a London-based analyst
with Rabobank Group. “Conditions tend to be more
volatile,” and there is “potential for price movements to
be exacerbated by political reactions to failing crops,”
such as Russia’s temporary suspension of wheat
exports in 2010 amid a severe drought.
“There is a need for a contract,” Higgins said, though
he cautioned these needs “are sporadic in nature,”
raising questions whether a futures contract can build
sufficient trading volume to prove useful.
About 130 years ago, the Black Sea region was
considered the “breadbasket” of the world, though
wars and Soviet-era mismanagement hampered
crop production. More recently, the area assumed
an expanding role in meeting growing global grain
demand. With most U.S. crop acreage fully utilized,
the importance of the Black Sea and other “nontraditional” producing regions will increase as the world
seeks to meet growing food demand, Seamon said.
There is “absolutely fabulous” farmland in the Black
Sea region “on par” with high quality soils in the U.S.
Midwest, Seamon said. “There’s incredible potential
for producing not only wheat, but other crops as well,”
such as corn and oilseeds.
The Black Sea region has potential to be the “swing
producer” for world wheat supplies, akin to Saudi
Arabia in crude oil, Seamon said. “When the world
needs an extra barrel of oil, Saudi Arabia can produce
it,” he said.
In wheat, the swing producer role was historically
played by American farmers. “That extra ton of wheat
was produced out of the U.S.,” Seamon said. “But we
believe that has shifted and the marginal tons of wheat
in the world are in the Black Sea region.”
CBOT soft red winter contract dominates
futures trade
During the marketing year that ended in June 2010,
Russia and Ukraine combined to export about 27.3
million metric tons of wheat valued at nearly $6.3
billion, accounting for 22 percent of global exports
totaling $29.1 billion, according to Global Trade
Information Services, Inc., a South Carolina-based
market data firm (the two countries’ share shrank to
6 percent the following year, largely because the 2010
drought slashed Russia’s crop).
At least 10 wheat futures contracts currently trade
worldwide, including versions listed on a Ukraine
exchange, on Moscow-based MICEX-RTS, NYSE
Euronext, and Intercontinental Exchange, Inc.
But CME Group dominates the trade with its CBOT soft
red winter wheat contract, which is based on a U.S.
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crop but often used by hedgers as a proxy for grain in
other parts of the world.
In 2011, an average of 114,935 soft red winter wheat
futures and options contracts, or more than 15.6
million metric tons, traded each day on CME Group.
That amounted to more than 70 percent of global
wheat futures and options trading. Wheat futures have
traded in Chicago since 1877.
The new CME Group contract will also offer spreading
opportunities against U.S. and Europe-based wheat
futures, analysts say. Priced in U.S. dollars, Black Sea
futures represent 136 metric tons, or 5,000 bushels,
per contract, the same as CME Group’s soft red winter
wheat contract.
Corruption, manipulation concerns present
obstacles
Still, CME Group faces plenty of obstacles to
establishing a viable market in an area still relatively
new to free-market mechanisms such as futures
contracts, several analysts said. Corruption and market
manipulation are concerns, some say, and Ukraine has
a long track record of government intervention in the
grain industry, according to a recent Bloomberg News
report.
Dmitri Rylko, general director with the Institute for
Agricultural Market Studies, a Moscow consultant, said
there are “several important justifications” for a Black
Sea wheat futures contract, yet also factors that make
its launch “quite risky and vulnerable.”
One potential problem is that delivery conditions, in
Rylko’s view, are “too strict and inflexible.” While the
contract’s delivery specifications may work perfectly in
other parts of the world, Black Sea market psychology
“is tuned to possibility of physical delivery, whether it
happens or not,” he said.
Another problem is Black Sea wheat is highly
dependent on one rather dominant player, Russia,
Rylko said. “Unlike many other markets, the
international community’s knowledge about Russia
and Russian wheat market situation is very limited,”
he said. Concern over manipulation, Rylko said, “may
partly undermine the contract credibility, at least at
initial stages of its existence.”
Pat Arbor, a veteran Chicago grain trader,
acknowledged the concerns with the Black Sea
market, but said the time may be right for the new
CME Group contract. While pricing in the region can
be “spotty,” there’s potential for an active arbitrage
market between Black Sea and CME Group futures,
according to Arbor, a former Chicago Board of Trade
president.
Launching the contract “makes a lot of sense,” Arbor
said. Capitalism and democracy “are both ugly, not
perfect, but they’re the best we have,” he said, referring
to free-market growing pains in the Black Sea region.
“The natural laws of supply and demand will eventually
prevail.
Bruce Blythe has been a Chicago-based business journalist since 1992 and has covered agriculture, futures exchanges and
other industries for Bloomberg, Reuters, Dow Jones Newswires and Crain’s Chicago Business.
You can contact Bruce Blythe at
Twitter@bruceBlythe, on LinkedIn, and at
[email protected]
*Disclaimer:
This information was obtained from sources believed to be reliable, but we do not guarantee its accuracy. Neither the information nor any opinion expressed therein constitutes a
solicitation of the purchase or sale of any futures or options contracts.
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