Market Outlook: Former Soviet Union nations jump exports; CME takes wheat futures

February 26, 2013 08:27 PM
 

by Jeanne Bernick and Ed Clark

KC Wheat Markets Move to Chicago

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CME Group, the world’s leading and most diverse derivatives marketplace, has announced it will transition open outcry trading of Kansas City Board of Trade (KCBT) hard red winter (HRW) wheat futures and options to its Chicago trading floor beginning July 1, pending CFTC review. This transition will accelerate efficiencies and trading opportunities for customers trading both the HRW wheat and CBOT Soft Red Winter (SRW) wheat varieties. KCBT wheat futures and options will continue to trade on CME Globex and be listed by and subject to the rules of KCBT.

The last day of open outcry trading on the KCBT floor will be June 28. CME Group will continue to operate an electronic trading center in the former KCBT floor space until the end of September, providing a place for Kansas City-based traders to execute trades on CME Globex.

"Throughout the integration process, we’ve remained focused on our customers who manage global price risk associated with these two classes of wheat," said CME Group COO Bryan Durkin. "By moving Kansas City wheat to the Chicago floor later this year, we will make it as efficient as possible for our customers to trade both products and the spread between the two."

In addition, beginning April 15 and subject to CFTC approval, customers will benefit from the integration of KCBT clearing services into CME Clearing, which will provide cross-margining and other capital efficiencies for a larger group of market participants.

Major Exports From former soviet Nations

A not-so-new kid on the grain production block is emerging as a growing export competitor—the former Soviet Union nations of Russia, Ukraine and Kazakhstan. From 2006 to 2011, grain exports by the three countries averaged 41 million metric tons (mmt), about 14% of the world’s total (including rice). That percentage of exports is expected to rise to 22% by 2021, according to USDA projections.

In a new report, USDA says that Russia wheat exports alone are projected to almost equal those of the U.S., and total wheat exports by Russia, Ukraine and Kazakhstan will exceed those of the U.S. by some 87%. However, growth of the livestock sector within those countries, aided by government policy, could mitigate these developments as expanding livestock herds reduce feed grain surpluses available for export. Growth of the region’s exports will also require infrastructure improvement for storing and transporting grain.

This abrupt change is in contrast to the late Soviet period, when the Soviet Union was a large grain importer. Key reason for the abrupt shift: Breakup of the Soviet Union in 1991 as the nations transitioned from centrally planned to market-driven economies. During the 1990s, grain imports largely ended, and these countries collectively became a small net grain exporter.

During the 2000s, the region emerged as a large grain exporter. Average annual grain exports rose from 9 mmt during 1996-2000 to 24 mmt during 2001-2005, increasing during 2006-2011 to 41 mmt. The movement of the region from a large grain importer to net exporter has created a swing of more than 50 mmt in the volume of grain available on the world market.

The main grain exported is wheat, accounting for more than 70% of its grain exports from 2006 to 2010, followed by barley with a 20% share. USDA economists attribute increased grain output, along with slow growth of domestic grain consumption, to the creation of surpluses for export.

Another key reason is the contraction of the region’s livestock sector.
The future will be one of increasing corn production, too. Compared with 2006-2010, corn area in Russia and Ukraine is expected to rise by 46% and 91%, respectively. Grain yields are expected to increase to a greater extent than grain area. For both Russia and Ukraine, area, yield and production of corn all increase more than wheat and barley.

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