Milling & Baking News - June 12, 2012 - 37

Analysts consider prospects for Black Sea wheat futures
KANSAS CITY — A new Black Sea wheat futures contract made its debut on the Chicago Board of Trade on June 6. The launch reflected the growing importance of exports from the Black Sea nations — Ukraine, Russia and Kazakhstan — and the need for better price discovery in relation to the region’s wheat. “Wheat exports from the Black Sea region in 2011-12 were 35 million tonnes, while U.S. wheat exports were 27 million tonnes, so you can see there are strong exports from that part of the world,” said David Lehman, managing director of commodity research and development at the CME Group. The Black Sea futures contracts are being traded electronically with trading hours from 2 a.m. Central time to 1:15 p.m. Monday through Friday to correspond to a trading day beginning at 10 a.m. and ending at 9:15 p.m. in the Black Sea region. The CME Group plans to give the wheat futures contract plenty of time to build open interest, said Mr. Lehman. “We’re not going to just give this product six months to develop enough liquidity and then walk away,” he said. That may be the best strategy, according to the collective wisdom of Advisory Services in St. Louis said he expected the CME’s concerted education effort aimed at Black Sea producers, processors and merchants will get them onboard once they understand the benefits of using futures. Still, the market must overcome problems such as weak regional infrastructure, a history of “backroom deals” on prices, the precedent of halting sales on unexpectedly poor crops, and the lack of a free-market tradition, the experts said. This broad uncertainty may limit trading by commercial interests and producers. Without enough participation by legitimate hedgers “you lack critical components of viable price discovery,” added Mr. Manternach. In addition, “futures depend on steady supplies,” Mr. Love said. “The U.S., Canada and Australia offer reliable supplies,” which may pull trade away from the Black Sea region. “Russian wheat has always been the cheapest in the world,” said Jack Scoville, vice-president, Price Futures Group, Chicago. At the turn of the 20th century, Black Sea real estate produced plenty of wheat to sell abroad, Mr. Scoville emphasized. “Over time, yields in Eastern Europe and Russia should rise,” Mr. Love said. “They have no place to go but up.” Weather poses challenges. Black Sea wheat, even more than wheat from some of its competitors, is vulnerable to periods of harsh winds and severe drought. This weather volatility is likely to offer arbitrage opportunities between Black Sea futures and markets in other countries, the analysts observed. Even if Black sea region wheat crops grow larger, the grain needs to reach ports swiftly and cheaply, said Mr. Scoville. Rail infrastructure needs improvement, he added. If the potential negatives are dealt with forcefully and the CME Group perseveres with the contract, the Black Sea wheat industry has the potential to flower, the analysts suggested. “I am cautiously optimistic that Black Sea futures can become a very useful tool,” Mr. Scoville said. MBN

‘We’re not going to just give this product six months to develop enough liquidity and then walk away.’
— David Lehman, CME Group

futures market analysts contacted by Milling & Baking News. While these experts agreed that a successful Black Sea wheat futures market may be useful in a region known for its lack of pricing transparency, they expressed the conviction that building this market will encounter difficulties. “We won’t know for a long time if the new contract will be successful,” said Sid Love, president of Kropf and Love Consulting Services, L.L.C., in Overland Park, Kas. Dave Manternach of Doane
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Milling & Baking News June 12, 2012 / 37

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Milling & Baking News - June 12, 2012

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