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Debut for Black Sea wheat derivatives contract

Agricultural traders and investors are watching the debut of a new derivative product that will allow them to bet on the benchmark price of Black Sea wheat.

Wheat is the largest traded grain on the international markets and Russia became the leading exporter last year. Russia, Kazakhstan and Ukraine — collectively known as the Black Sea region among grain traders — accounted for just under a third of global wheat exports in the 2015-16 crop season.

Grain brokers have started to offer over-the-counter Black Sea derivative contracts based on the Russian wheat benchmark shipped out of the Novorossiysk port. The first derivative deal based on Black Sea wheat prices from S&P Global Platts, the commodities pricing agency, was traded at the end of last week.

Swiss-based grain traders Ameropa and Solaris Commodities were on both sides of the trade brokered by SCB Group, priced at $188 a tonne. The French wheat contract traded at around €174 a tonne on the Matif exchange on Friday.

Swithun Still, director at Solaris, said: “Solaris trades significant volumes of physical wheat via Novorossiysk and can use this product as a hedge for our physical book.”

Black Sea wheat prices also act as a pricing reference for Romanian and Bulgarian wheat exports. The region is the key supplier to north Africa and the Middle East, while Russian wheat has also been sold to Asian and South American markets.

Despite its growing importance, the region has lacked a dedicated derivatives market reflecting its own supply and demand. Traders looking to hedge their physical positions had used prices on the CME in Chicago or Matif in France.

“This deal is a significant step towards the emergence of a new regional futures market for Black Sea wheat,” said Ian Dudden at S&P Global Platts. The pricing agency has also started to offer prices for Australian wheat export against which a similar deal was traded five months ago.

The rise of Russian wheat comes as US wheat production and exports have been declining. Bumper crops that have led to higher production in other countries as well as the stronger dollar has meant that returns for US wheat farmers have fallen, leading them to cut acreage.

Some traders remain cautious about the new product as new derivatives products for agricultural commodities often fail to take root. The CME launched Black Sea wheat futures contracts in 2012, which are now dormant.

Even with the new OTC derivatives the “bid-offer spread remains wide,” said Mr Still, indicating relative lack of players participating in the market.

The historical reasons for the lack of derivative trading in Black Sea grains are multifold. On top of geopolitical concerns, Ukrainian and Russian authorities have a record of political interventions in the grains markets and there have long been concerns about Ukrainian and Russian sellers defaulting on agreements.

A simple lack of knowledge about futures markets among buyers and sellers in the region as well as specification and logistical issues have also hampered derivative transactions.

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