Chicago’s CME Strains to Reflect Global Grain Trade
Tariffs add to forces changing wheat and soybean flows, threatening to leave futures pioneer behind
Russian wheat has grown more important to global markets in recent years, which presents challenges to the giant exchange operator, CME Group. PHOTO: ANDREY RUDAKOV/BLOOMBERG NEWS
By
Benjamin Parkin
July 21, 2018 8:00 a.m. ET
CHICAGO—The world’s largest exchange company is struggling to keep up with tariffs and a surge in global crop production that is reshaping agricultural trading.
CME Group Inc., CME 0.09% whose antecedents helped invent futures contracts in the 19th Century, ties its main agricultural products to the value of American crops. And while CME’s futures have grown, some say the exchange risks missing out on the boom in countries including Russia and Brazil, which now export more of some agricultural goods than the U.S.
“It’s a growing problem for the CME,” said Dan Basse, president of AgResource Co., a research firm.
Trade fights are hastening the shift. China, one of the world’s largest crop buyers, has switched much of its soybean purchases from the U.S. to Brazil. As a result, soybean prices have surged in Brazil and fallen in the U.S., making CME contracts tied to American beans a less useful global gauge, analysts say.
And Russia has surpassed the U.S. as the world’s top wheat exporter, which can make CME contracts for Midwestern wheat harder to use.
CME needs to keep up with agricultural trade patterns to retain customers like Bunge Ltd.and other commodity merchants, whose businesses increasingly span the globe. “You’ve got to go where the grain flows are,” said Bobby Pelz, a partner at McDonald Pelz Global Commodities LLC, which grew from a small U.S.-focused brokerage to a business with offices in 10 countries.
Black Sea BoundEuronext's EU wheat futures emerged as analternative contract closer to Russia andUkraine.Open interest in wheat contracts*Source: Futures Industry Association*Three-month moving average
.million contractsOthersEuronext Derivatives MarketChicago Board of Trade2000’05’10’15012
Using crops grown near Chicago to set prices for those grown near the Black Sea in Russia and Ukraine, for instance, can expose traders to discrepancies in weather and crop quality. Grain trader Archer Daniels Midland Co. said it lost more than $20 million trying to hedge Black Sea grain using North American prices in the third quarter of 2017.
CME has introduced new agricultural contracts to address these shifts, but few have caught on.
The exchange company this month delisted contracts for wheat from the European Union that have failed to attract participants. A contract for Black Sea wheat from 2012 also petered out, as did one for South American soybeans introduced by the Chicago Board of Trade in 2005. The Chicago Board of Trade and the Chicago Mercantile Exchange merged to form CME Group in 2007.
Futures CME introduced in December for Black Sea wheat has grown to about 20,000 contracts, compared with almost half a million in CME’s main Chicago contract. Another introduced last year for Australian wheat has attracted some trading.
CME Chairman Emeritus Leo Melamed traveled to Ukraine around 2010 to attempt to launch wheat contracts there. That didn’t work, but he said CME has to keep trying. “Anything we can do to plant our flag there is important,” Mr. Melamed said.
Exchanges in other parts of the world have gained ground. In China, the world’s top soybean buyer, soybean-oil futures at the Dalian Commodity Exchange regularly trade at higher volumes than CME’s, though the contract size is smaller. Euronext N.V . ’s futures for EU wheat have also emerged as an alternative to CME.
Grain Exchange
More of the world's most actively traded agricultural futures are based outside the U.S.
Top 15 agricultural futures and options, by number of contracts
2017 VOLUME, IN MILLIONS
EXCHANGE
FUTURES CONTRACT
162.9
Soybean Meal
Dalian Commodity Exchange
127.3
Corn
Dalian Commodity Exchange
89.9
Chicago Board of Trade
Corn
89.3
Shanghai Futures Exchange
Rubber
79.7
Zhengzhou Commodity Exchange
Rapeseed Meal
68.0
Dalian Commodity Exchange
RBD Palm Olein
61.1
Zhengzhou Commodity Exchange
White Sugar
57.2
Dalian Commodity Exchange
Soybean Oil
54.5
Chicago Board of Trade
Soybean
50.4
Corn Starch
Dalian Commodity Exchange
37.3
Egg
Dalian Commodity Exchange
33.7
Wheat*
Chicago Board of Trade
31.0
Sugar #11
ICE Futures U.S.
30.2
Chicago Board of Trade
Soybean Oil
26.3
No. 1 Soybean
Dalian Commodity Exchange
*Soft Red Winter Wheat
Source: Futures Industry Association
“There is a clear shift,” said Nicholas Kennedy, head of commodities at Euronext, which has considered introducing its own Black Sea contracts. “The Black Sea, Ukraine and Russia are playing a greater role on the trading floors.”
Still, CME’s agricultural contracts are the world’s most popular by far. Open interest at CME, a measure of participation, rose to a record of over 10 million contracts in June. Trading volumes have also risen, including outside the U.S.
The contracts remain “the global benchmarks for price discovery and risk management,” said Tim Andriesen, CME’s managing director of agricultural products. “While import and export patterns may shift, the need for managing price risk has never been more important.”
CME’s other businesses have thrived lately. Interest rates and market volatility have perked up in recent years, which boosts traders’ need for CME’s financial products. Shares in CME are up 16% this year, while the S&P 500 is up 5%.
While CME derived just 11% of its first-quarter revenue from agricultural commodities, it still counts crops as an important business line. Its more successful Black Sea contract, introduced in December, was tweaked to follow a price tracker rather than physical grain deliveries. The contract has also attracted business through a tool allowing traders to privately negotiate bulk deals before they are disclosed on the open market.
Swithun Still, director of Solaris Commodities S.A., a Switzerland-based grain trader using the contract, said that liquidity, or ease of trading, had improved, but that the futures still diverge at times from physical prices. “There’s still some work to do,” he said.
CME’s Mr. Andriesen says it is difficult in general to generate traction for new commodity contracts. “We’re pretty optimistic that we’re seeing some success,” he said.
Tariffs add to forces changing wheat and soybean flows, threatening to leave futures pioneer behind
Russian wheat has grown more important to global markets in recent years, which presents challenges to the giant exchange operator, CME Group. PHOTO: ANDREY RUDAKOV/BLOOMBERG NEWS
By
Benjamin Parkin
July 21, 2018 8:00 a.m. ET
CHICAGO—The world’s largest exchange company is struggling to keep up with tariffs and a surge in global crop production that is reshaping agricultural trading.
CME Group Inc., CME 0.09% whose antecedents helped invent futures contracts in the 19th Century, ties its main agricultural products to the value of American crops. And while CME’s futures have grown, some say the exchange risks missing out on the boom in countries including Russia and Brazil, which now export more of some agricultural goods than the U.S.
“It’s a growing problem for the CME,” said Dan Basse, president of AgResource Co., a research firm.
Trade fights are hastening the shift. China, one of the world’s largest crop buyers, has switched much of its soybean purchases from the U.S. to Brazil. As a result, soybean prices have surged in Brazil and fallen in the U.S., making CME contracts tied to American beans a less useful global gauge, analysts say.
And Russia has surpassed the U.S. as the world’s top wheat exporter, which can make CME contracts for Midwestern wheat harder to use.
CME needs to keep up with agricultural trade patterns to retain customers like Bunge Ltd.and other commodity merchants, whose businesses increasingly span the globe. “You’ve got to go where the grain flows are,” said Bobby Pelz, a partner at McDonald Pelz Global Commodities LLC, which grew from a small U.S.-focused brokerage to a business with offices in 10 countries.
Black Sea BoundEuronext's EU wheat futures emerged as analternative contract closer to Russia andUkraine.Open interest in wheat contracts*Source: Futures Industry Association*Three-month moving average
.million contractsOthersEuronext Derivatives MarketChicago Board of Trade2000’05’10’15012
Using crops grown near Chicago to set prices for those grown near the Black Sea in Russia and Ukraine, for instance, can expose traders to discrepancies in weather and crop quality. Grain trader Archer Daniels Midland Co. said it lost more than $20 million trying to hedge Black Sea grain using North American prices in the third quarter of 2017.
CME has introduced new agricultural contracts to address these shifts, but few have caught on.
The exchange company this month delisted contracts for wheat from the European Union that have failed to attract participants. A contract for Black Sea wheat from 2012 also petered out, as did one for South American soybeans introduced by the Chicago Board of Trade in 2005. The Chicago Board of Trade and the Chicago Mercantile Exchange merged to form CME Group in 2007.
Futures CME introduced in December for Black Sea wheat has grown to about 20,000 contracts, compared with almost half a million in CME’s main Chicago contract. Another introduced last year for Australian wheat has attracted some trading.
CME Chairman Emeritus Leo Melamed traveled to Ukraine around 2010 to attempt to launch wheat contracts there. That didn’t work, but he said CME has to keep trying. “Anything we can do to plant our flag there is important,” Mr. Melamed said.
Exchanges in other parts of the world have gained ground. In China, the world’s top soybean buyer, soybean-oil futures at the Dalian Commodity Exchange regularly trade at higher volumes than CME’s, though the contract size is smaller. Euronext N.V . ’s futures for EU wheat have also emerged as an alternative to CME.
Grain Exchange
More of the world's most actively traded agricultural futures are based outside the U.S.
Top 15 agricultural futures and options, by number of contracts
2017 VOLUME, IN MILLIONS
EXCHANGE
FUTURES CONTRACT
162.9
Soybean Meal
Dalian Commodity Exchange
127.3
Corn
Dalian Commodity Exchange
89.9
Chicago Board of Trade
Corn
89.3
Shanghai Futures Exchange
Rubber
79.7
Zhengzhou Commodity Exchange
Rapeseed Meal
68.0
Dalian Commodity Exchange
RBD Palm Olein
61.1
Zhengzhou Commodity Exchange
White Sugar
57.2
Dalian Commodity Exchange
Soybean Oil
54.5
Chicago Board of Trade
Soybean
50.4
Corn Starch
Dalian Commodity Exchange
37.3
Egg
Dalian Commodity Exchange
33.7
Wheat*
Chicago Board of Trade
31.0
Sugar #11
ICE Futures U.S.
30.2
Chicago Board of Trade
Soybean Oil
26.3
No. 1 Soybean
Dalian Commodity Exchange
*Soft Red Winter Wheat
Source: Futures Industry Association
“There is a clear shift,” said Nicholas Kennedy, head of commodities at Euronext, which has considered introducing its own Black Sea contracts. “The Black Sea, Ukraine and Russia are playing a greater role on the trading floors.”
Still, CME’s agricultural contracts are the world’s most popular by far. Open interest at CME, a measure of participation, rose to a record of over 10 million contracts in June. Trading volumes have also risen, including outside the U.S.
The contracts remain “the global benchmarks for price discovery and risk management,” said Tim Andriesen, CME’s managing director of agricultural products. “While import and export patterns may shift, the need for managing price risk has never been more important.”
CME’s other businesses have thrived lately. Interest rates and market volatility have perked up in recent years, which boosts traders’ need for CME’s financial products. Shares in CME are up 16% this year, while the S&P 500 is up 5%.
While CME derived just 11% of its first-quarter revenue from agricultural commodities, it still counts crops as an important business line. Its more successful Black Sea contract, introduced in December, was tweaked to follow a price tracker rather than physical grain deliveries. The contract has also attracted business through a tool allowing traders to privately negotiate bulk deals before they are disclosed on the open market.
Swithun Still, director of Solaris Commodities S.A., a Switzerland-based grain trader using the contract, said that liquidity, or ease of trading, had improved, but that the futures still diverge at times from physical prices. “There’s still some work to do,” he said.
CME’s Mr. Andriesen says it is difficult in general to generate traction for new commodity contracts. “We’re pretty optimistic that we’re seeing some success,” he said.
