New Australia wheat futures contract is traded for first time

CME, which operates the world’s major wheat futures product,  the Chicago futures contract, has identified Australia as a critical market for wheat.

“We looked at key markets globally and Australia is critical in the wheat area,” said Tim Andriesen, managing director of agricultural products with the CME Group.

“The next thought was how we could provide a risk management product in the space and the Australian wheat futures contract was what we came up with.”

Mr Andriesen said the product was designed to allow investors to manage risks within the Australian industry in specific.

“The drivers of Australian supply and demand can be different to those on the global scale and this product can give investors a way to manage this risk and Australian basis specifically,” Mr Andriesen said.

“If you want to trade options, we’d probably recommend you use one of our established products, if you want something to represent the Australian cash price then this is the product.”

Mr Andriesen said he expected the market to welcome the opportunity to broaden their risk management strategies.

“When you think of marketing and risk management, the key is to have as many tools in the tool box as you can.

“If I am an importer of Australian wheat and I need something that specifically tracks Australian export values, this is the product, whereas if I am sourcing wheat from an unknown origin and I am exposed to wheat on a macro level then I will trade more traditional futures.

Mr Andriesen said the company also hoped the contract served as a guide for the Australian domestic market.

“We did think about the Australian domestic market as well when thinking of how to create the product.”

Nelson Low, executive director of agricultural products with the CME Group, said the creation of the Australian futures contract demonstrated the increased diversification within the wheat market.

“We decided to offer the product as on a FOB (free on board) basis as that is an area we are strong in and also because a lot of global users have indicated they would like to see a FOB Australian product, as it will help them with their origin spreads,” Mr Low said.

“The wheat market is becoming more diverse with new exporters coming up and the trade needs to manage that.”

Mr Low said the CME Group was targeting slow and steady growth with the futures offering.

“We believe the old adage, slow and steady wins the race, we will be relying on interdealer brokers to start creating a market, matching trades and then we expect it will build from there.”

He said along with the trade in Australia, the contract would appeal to those who wanted exposure to the Australian industry.

“There are folks out there not directly exposed to the Aussie wheat industry but who want to be and by offering a financial product, rather than a physical product, they now can get that exposure.”

“Folks don’t want 50 tonnes of Australian wheat on their doorstep in London, but they will see this contract as opportunity to trade not just wheat but specifically Australian wheat.”

Mr Andriesen agreed.

“Historically, if you wanted exposure to Australian wheat you went out and bought a vessel of 30-50,000 tonnes, now you can buy a 50 tonne contract and avoid that massive capital outlay.”

The first trades, brokered by SCB, saw 60 futures contracts traded, the equivalent of 3000 tonnes.

SCB officials were pleased at the launch of the new product, saying it was a new way to manage risk.

James McKay, a broker at SCB said the CME product offered flexibility.

“It gives the trade a chance to better manage price risk and it will provide industry participants greater flexibility with which to run their businesses,” he said.