CME should think bigger on Black Sea wheat futures ( Thursday 07/06/2012 ).

Discussion in 'Commodity Futures' started by kanellop, Jun 7, 2012.

  1. kanellop


  2. kanellop


    Hello Again to All.

    Here are some News that published in the Thomson Reuters Inside Agriculture Report of 08/06/2012.

    Here are:


    COLUMN:Black Sea wheat - full of promise and pitfalls

    By Gavin Maguire

    CHICAGO, June 7 (Reuters) - The new Black Sea wheat futures contract launched this week on the CME certainly sounds like a good idea,

    given that the region accounts for roughly a quarter of world wheat trade and is located on the doorstep of Europe, the Middle East, and Africa --

    all major importers of wheat and other grains.

    But uptake and use of the contract may prove slow going since two of the region's top wheat exporters -- Russia and Ukraine --

    have a track record of reneging on trade contracts whenever domestic supplies threaten to fall short,

    and risk-management practices featuring the use of futures and options contracts remain in their infancy among the area's producers

    and commercial users.


    Only a single transaction occurred on the Black Sea wheat contract's first full trading day,

    taking place at $254.50 per metric ton shortly before 9:00 a.m. Chicago time.

    This price placed the contract virtually halfway between the CME's domestic wheat contract

    -- one of the cheapest and most widely traded wheat futures in the world --

    and the European milling wheat contract traded on NYSE Liffe,

    traditionally the world's most expensive wheat futures contract.

    Graphic of world wheat futures prices:

    It can be assumed that the CME was hoping for slightly better volumes than the estimated three contracts (408 metric tons)

    that took place amid the sole transaction on its opening day,

    but the fact that there's a new tradable entity available to global wheat traders that is anchored to physical supplies in one of the world's critical

    -- and more volatile --

    producing and exporting regions marks a major milestone in the global grains arena.


    The group of countries that make up the Black Sea "bloc" of wheat merchants -- mainly Kazakhstan, Russia and Ukraine --

    are not new to the wheat-growing scene.

    Indeed, farmers have been cultivating wheat and numerous other crops across the region's "Black Earth" for more than a century,

    and so have had their fair share of bumper and failed harvests.

    But over the past 20 or so years, the region has transformed its status on the export stage

    from a bit-part player accounting for 5-10 percent of world trade

    to a dominant participant originating roughly 25 to 30 percent of world wheat exports.

    This emergence as an export powerhouse was brought about in part by large infrastructure expansions in Russia and Ukraine

    that have allowed a more orderly flow of grain from across the vast Eurasian Steppe to port facilities across the Black Sea

    and out to markets as far afield as South America and Asia.

    But rapid demand growth in key areas such as North Africa and the Middle East has also spurred Black Sea-area export growth.

    Combined wheat imports into North African nations such as Algeria, Egypt and Morocco have nearly doubled since 1990

    from roughly 12 million metric tons per year to a projected 20-21 million tons in 2012.

    Considering that total wheat exports out of Kazakhstan, Russia and Ukraine are projected to come in at around 30.5 million tons this year,

    the North African market alone represents an enormous incentive for the region's exporters,

    especially since those destinations lie a relatively short vessel journey away.

    But Black Sea traders also have fairly direct access -- through the Suez Canal -- to markets farther afield,

    such as South Asia and Indonesia, which are large net importers of wheat and other grains.

    The relatively low freight rates resulting from its closer proximity to many major destinations further strengthen the area's competitive appeal.

    Graphic of Black Sea area map:

    Graphic of freight rates to key destinations:

    The entry into the Mediterranean also opens up Europe as another potential market,

    and highlights the Black Sea as a key hub for access to a number of key continents and markets for traders in the region.

    It is this accessibility to major populations that gives the Black Sea wheat contract its promise,

    and is why the region will remain a closely monitored barometer of global trade potential in the years ahead.

    Graphic of Black Sea wheat producer share of world trade:


    As old as the region is in terms of wheat production,

    many of the players in the area continue to make amateur mistakes when it comes to international trade decisions.

    During the drought-ravaged growing season of 2010 -- when the world's top importers were in dire need of steady wheat supplies--

    Russia and Ukraine reneged on trade agreements and halted or slowed exports of wheat for several months.

    This came despite the opening that year -- to much fanfare --

    of a government-funded grain terminal at the Russian port of Tuapse.

    The facility's shiny new silos and rail connections were heralded by senior politicians

    that year as a key step toward a greater Russian presence in global grain trade.

    But less than six months later the country banned all wheat exports,

    while neighbor Ukraine announced tight export caps soon after effectively to take the region out of the wheat market entirely

    and make a mockery of the stated intentions to become a major player on the wheat export stage.

    That willingness to tear up trade agreements and cut off grain flows just when importer nations needed them most has given

    Russia and Ukraine serious credibility issues among the importing crowd.

    Trade balance sheets for countries across North Africa and the Middle East were devastated by the soaring price of wheat that year,

    while much of the social unrest that flared up that summer stemmed from protests over food inflation.

    As a result, heavily import-dependent nations have been forced to establish back-up plans for their wheat

    and crop procurement to enact whenever Black Sea shipments get canceled again in order to prevent a repeat of the panic seen in 2010.

    But the fact that those countries need to prepare for the possibility of a major exporter shutting up shop

    whenever supply concerns crop up may actually inhibit demand growth for Black Sea area exporters,

    as many importer countries have been advised to develop and expand import deals with more-reliable suppliers

    such as the United States, Canada and Australia in order to diversify their food security risks.

    This "diversity" approach to crop procurement has resulted in trade growth for exporters

    in locations such as North America and Australia in recent years,

    but has led to a slight slowdown in export growth in the Black Sea region.

    Should that trend continue,

    and several of the world's top wheat importers consistently distribute their wheat purchases across a number of suppliers

    rather than focusing on a single exporter,

    Black Sea shippers may see slower overall trade expansion than envisaged,

    and may need to compete on more than price going forward if they are to secure and develop trade relationships.

    Graphic of wheat exporters by region:

    So while the Black Sea area is a logical locale to develop

    and expand a new wheat market hub, it is not guaranteed that exporters in the region will see a boom in business

    merely because they have a new tool to offer market participants.

    Much will depend on the willingness of key trade partners to look past the actions of 2010 that left many of them

    stranded in a time of need and expand their import purchases from Black Sea sellers.

    However, if key importers remain committed to sourcing grain from a wide slew of suppliers regardless of the price

    and quantities available in any particular region,

    Black Sea exporters may find it hard to achieve their ambition to expand further their share of world wheat trade.

    --Gavin Maguire is a Reuters market analyst.

    The views expressed are his own.


    Kind Regards,

    George Kanellopoulos.