The Way Forward for Black Sea Wheat


Today the world is consuming more food than ever. Certain regions are specially equipped to produce the crop required to meet increasing demand. Latin America is that area for soybeans. For grains, it’s the Black Sea.

130 years ago, this region was known as the breadbasket of the world.  Over time, war and Soviet agricultural policy largely hindered the robust agricultural production that is possible there.  With the fall of the Soviet Union, however, this region’s farms – home to some of the best soil in the world – are finally starting to produce and export grain at some of the world’s highest levels once again.

Today I’m joining CME Group colleagues and dozens of other commodity markets experts at the Black Sea Grain conference in Kiev, Ukraine. This conference is in its ninth year, but has arguably never organized at a time more pivotal to the future of grain markets for the Black Sea region.

Russia and Ukraine exported about 20 percent of the world’s wheat for the 2011-2012 marketing year, making the region the number two exporter in the world after the United States (the number jumps to 24 percent when including Kazakhstan). This is astonishing given that the region represented only 3 percent of global wheat exports in the 2003-2004 marketing year.

source: USDA. Data based on numbers for Russia, Ukraine and Kazakhstan

The steadily increasing presence and adoption of technology, increased capital, entrepreneurship, and accessibility to fertilizer in the region following the collapse of Soviet policies is largely responsible for this growth. But the region still has a great deal of potential in each of these areas.

Alexei Gavrilov, former President of the Grain and Feed Trade Association (GAFTA) and a Ukraine native, told CME Group Magazine (now OpenMarkets) last year of the Black Sea’s growth, “Five years ago, 40 million metric tons of total production was considered a bumper crop. Now it’s considered dangerously low.” He also said he expects wheat exports to double in the next 10 years. If that comes to pass, it would cement the region as the world’s largest exporter by far.

But with the current and expected production growth, producers in the region and buyers of Black Sea Wheat, such as those in North Africa and the Middle East, have an increased need to manage their price risk. Despite its position as a top exporter, the Black Sea is essentially the only wheat producing area in the world without its own futures contract. That’s why, at the conference in Kiev today, we announced the launch of a Black Sea wheat contract that is better placed to converge with wheat produced in the region, and is deliverable at several ports along the Black Sea.



Up to now, producers and buyers of Black Sea wheat have mostly had to negotiate a price for deliverable wheat and trust that their counterparty will not back out of the deal in favor of a better one. Complicating this situation further is the international nature of most of the trades. For example, a privately negotiated trade between a buyer out of Egypt and a producer from Ukraine that falls apart can, in addition to increasing volatility in grain prices, become an international legal nightmare for one or both parties. With an exchange traded futures contract, both parties can safely transfer their risk with the added benefit of central clearing.

Terry Roggensack from The Hightower Report weighed in this morning from the CME Group floor on what the announcement of the new contract means for grain market transparency in the region:




Though political uncertainty in the region and weaker protections of property rights laws do present risks – we sought to address these through a memorandum of understanding signed last year withthe UFE and the Ukrainian government – perhaps the biggest challenge for some producers, buyers, and even multinational banks who trade in the region will be understanding the opportunity that a futures market presents to manage price risk. To help with their education, we’ve gone to Ukraine to meet with a wide variety of hedgers, agribusiness, multinational firms, and students to discuss markets and share the basics on how to trade.

A little more than a century ago, the Chicago Board of Trade had a contract that was delivered in Odessa, Ukraine.  We’re returning to that market because today there is a great opportunity for a Black Sea wheat contract to become a global pricing benchmark. However, more important is the need for agribusiness in this region to limit its risk exposure as the world increasingly turns to it for food production. There is no better way to do this than through the presence of efficient and transparent futures markets.


Jeffry Kuijpers is executive director of commodity products at CME Group.

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