CME (NYSE:CME) launching Black Sea Wheat futures contract in June


CME Group Inc. plans to bring the first local futures contract to the Black Sea region, launching Wheat futures in the hopes of capturing an increasingly important, but unreliable, market.

The exchange, which dominates grains trading in the US, said Wednesday it plans to launch the contract in June, with delivery points at Black Sea ports in Russia, Ukraine and Romania.

This breadbasket accounts for roughly 20% of the World's wheat exports, and the US Department of Agriculture projects that will climb to 30% in the next decade.

But the region has suffered from a lack of physical infrastructure and government export bans, which could make the large grains traders who are crucial to the contract's success wary of using it, traders said.

Grain export restrictions are unheard of in the US, the World's largest Wheat exporter, but have been commonplace in the Black Sea.

Russia banned grain exports for nearly a year after a historic drought there in Y 2010 sparked concern about domestic food supplies.

Earlier this year, a Ukrainian advisory firm said many traders had agreed to restrict exports in response to a government request as a cold snap prompted worries about crop damage there.

The exchange is reasonably comfortable about export flow, said CME Managing Director Tim Andriesen, in part due to its belief that governments there recognize bans are counterproductive.

Potential problems with export restrictions would also be limited by the fact the contract will have delivery points in three different countries, he added.

If one of those countries were to shut off exports, it wouldn't disable the contract, Mr. Andriesen said in a conference call.

That may not prevent problems, analysts said, as long distances between the countries would mean big differences in transportation costs and logistics complications depending on where the grain is coming from. In addition, any weather problem that is severe enough to cause concern about domestic food supplies could affect countries throughout the region.

Still, traders said the contract had a chance of success if grain merchandisers decide it is an effective hedging tool.

The new contract comes as large grain handlers such as Archer Daniels Midland Co. (NYSE:ADM) and Bunge Ltd. (NYSE:BG) increase their presence in the region.

Last summer, ADM bought 12 grain elevators along the Danube River in Romania to move supplies more easily to the Black Sea.

Bunge, which operates grain elevators throughout Ukraine and Russia, bought a Ukrainian port terminal in 1-H of Y 2011, which helped it outperform peers in the most recent quarter as exports boomed.

Cargill Inc. has invested nearly US$1-B in the region since establishing a permanent on-the-ground presence after the fall of the Berlin Wall, and employs nearly 3,000 people in the region.

All 3 companies declined to comment on the CME's new Wheat contract.

Countries in the region have increased their Wheat standards in an effort to win export business, traders said. Fifteen years ago, inspectors had to check Ukrainian wheat for excess radiation levels in the wake of the Y 1986 Chernobyl disaster. The quality across the region has long since improved. They are becoming World traders.