Russia is exploring the creation of a regional wheat futures market and this month held talks with senior executives at CME Group Inc., according to a senior official at the Chicago-based exchange operator.
The planned venture would add another global platform for trading alongside Chicago and Paris, serving the fast-growing “bread basket” of Russia, Ukraine and Kazakhstan, which has become an increasingly important source of European food imports.
Leo Melamed, the CME’s chairman emeritus, said the discussions with Russian government and exchange officials looked at how the Chicago-based market operator could contribute expertise to the project and list contracts on its Globex electronic trading platform.
The discussions come after the havoc wreaked on this year’s Russian grain harvest by drought, prompting a government ban on wheat exports that sent global prices higher. Ukraine, another major grain exporter, curtailed its own wheat exports earlier this month.
“If they had a futures market to help insure their crop, farmers would’ve saved a lot of money,” Melamed said in an interview.
The new wheat venture serving eastern Europe and central Asia is still in the discussion stage, but could see CME help design a new market from the ground up in an area–wheat–that ranks among its most active and long-running commodity markets. The Chicago Board of Trade, owned by CME, is the world’s largest wheat exchange and often sets a global benchmark for wheat prices.
Ideally, Melamed said, such an exchange would unify the region’s major wheat producers in Russia, the Ukraine and Kazakhstan. Russian exchange operators RTS Stock Exchange and Micex Group would be involved in shaping the new market, he said, which would also need the blessing of the respective governments.
“If we did put something together with them, it would be a huge benefit to the Eastern European region, and a major benefit for CME Group,” he said.
Alongside Melamed, CME Chief Executive Craig Donohue joined in the early October meeting, as well as board members Charles Carey and John Sandner. The discussions were hosted by Russia’s First Deputy Prime Minister Viktor Zubkov, and included executives from Micex and RTS.
Exchange groups have long sought an entry point to resource-rich Russia, but have been stymied by a regulatory structure that has proven tough for outsiders to navigate. A cross-border market for a politically touchy product like grain poses additional challenges, according to Dan Gramza, a consultant who has worked with more than 30 international exchanges.
“The issue is the political willingness to allow information to be presented,” he said. “Another issue is getting accurate data, so people around the globe can see that the information is reliable.”
CME, the biggest futures exchange in the world by contract volume, has arranged tie-ups with a spectrum of developing international markets, including Brazil’s BM&FBovespa SA (BVMF3.BR), the Dubai Mercantile Exchange, Bursa Malaysia and the Mexican Derivatives Exchange, a unit of Bolsa Mexicana de Valores SA (BOLSA.MX).
Melamed, who has also met with Ukrainian officials on wheat market matters, said that CME has sent emissaries to that country as well to talk market development.
The biggest hurdle for any new regional commodity market is to expand beyond its base of local users and lure international investors and speculators, said Tim Hannagan, senior grain analyst for brokerage firm PFGBest.
“They tend to get to a point after three to five years where they have all their local grain end-users, but it never goes beyond that,” said Hannagan.
