CHICAGO, Ill. — Less than a year after creating agreements allowing Chicago-based CME Group, Inc. to explore establishing commodities exchange in Ukraine, the company has announced it will launch Black Sea wheat futures contracts on its electronic trading platform, Globex, beginning June 6.

The news came from CME – which also operates the Chicago Board of Trade (CBOT), New York Mercantile Exchange and COMEX – as it participated in the Black Sea Grain Conference in Kiev, Ukraine’s capital, last week. Launch of the futures contracts is pending regulatory approval, but if OKed will begin with the July 2012 contract month.

“(The Black Sea re
gion is) a fast-growing market and becoming quite an exporter into the world market,” said Dave Lehman, managing director of CME Agricultural Commodities, Research and Product Development.

The contracts designate nine possible delivery points on tributaries – five ports in Ukraine, three in Russia and one in Romania – which Lehman said provide the region its majority of wheat export capability.

According to CME, USDA figures show Russia, Ukraine and Kazakhstan produced nearly 70 million metric tons (mmt) of wheat in 2010-11 and are projected to harvest more than 100 mmt for 2011-12. The three countries are responsible for approximately 24 percent of the world’s total wheat exports in 2011-12.

These three are exporting about 35 mmt of wheat, or 35 percent of their total production, for 2011-12. This compares to approximately 27 mmt the United States is exporting – which is just under half of its projected 54.4 mmt production.

Lehman said CME has worked on establishing a relationship with a Black Sea-area consultant who in turn introduced its representatives to regional traders and familiarized them with local shipping.

He said there are no local futures exchanges in the Black Sea region, just cash market. CME stated it is establishing this contract as a hedging tool to offer those with an interest in the region’s wheat the chance at price discovery and risk management.

What farmers in the region grow is winter wheat, similar to varieties planted in this part of the Midwest and upper South (and traded in futures on CBOT). Lehman said total Black Sea wheat production is a mix of about 60 percent milling and 40 percent feed quality; milling quality is what will be traded in futures.

He said CME as a company doesn’t engage in speculation about future volume of or income from any product, but it believes these wheat futures have the “potential to be a significant contract.” One challenge is to educate consumers unfamiliar with futures trading or with CME and Globex as to market procedures.

Should this work out for CME, Lehman said Black Sea region farmers also grow a great deal of corn that could potentially be the basis for more area futures contracts. Key to the wheat contract’s success will be early liquidity, or a large enough number of traders willing to invest enough dollars to make it worthwhile, he explained.

Jerrod Kitt, director of research for the Linn Group of Chicago specializing in grains and energy, agreed about liquidity and success – but questions whether hedgers, speculators and other investors will put their money into this contract. While he admitted it’s premature to say if CME will be successful with this new product, he is personally “doubtful” of it.

“I’m not terribly optimistic about this working out,” he said.

For one thing, it was just 18 months ago Ukraine’s government imposed quotas limiting wheat exports out of the country, following an outright Russian export ban on its own wheat in August 2010. This was because of a shortage of wheat in the Black Sea region due to severe drought. Had there been a futures exchange at work at that time, Kitt said, “That would have totally, absolutely hurt these contracts.”

While it’s not impossible the U.S. government could do the same in a bad enough situation, he believes it would be more difficult to impose such a ban here than in Russia or Ukraine.

Kitt said grain production in the Black Sea region fluctuates quite a bit not only because of uncertain weather – such as the drought in 2010 – but because farmers there use poorer inputs than American farmers, for example.

While that situation is improving, he said the area is still more vulnerable to weather and pests than U.S. crops.

Second, Kitt said CME should work on improving its existing wheat contracts before launching new ones.

He explained there is negativity surrounding wheat contracts because of a lack of convergence between futures and cash prices.

One suggestion he said analysts he knows have put forth is for milling-quality wheat futures through the Kansas City Board of Trade and the Minneapolis Grain Exchange to be grouped with CBOT milling contracts, and for feed-quality wheat to be confined to CBOT. (As the Eastern Corn Belt and south grow winter wheat, the Western Corn Belt and Plains states produce mostly spring wheat used in milling.)

“(CME) should take a good, hard look at what they have before starting up something new,” Kitt opined, adding he thinks the company would see more volume – and income – from tweaking current food commodity contracts.

Shawn Hackett, president of Hackett Financial Advisors, Inc. in Florida, didn’t comment on the potential for success of the Black Sea contract, but said of its launch, “Anything that allows for more price transparency and price diversity is a good thing in my book.”

Jeffry Kuijpers, executive director of commodity products at CME, wrote: “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 … With an exchange traded futures contract, both parties can safely transfer their risk with the added benefit of central clearing.”

CME stated the contract will be U.S. dollar-denominated and will be 136 metric tons per contract, similar to benchmark CBOT wheat futures.