WPI Spotlight

Chicago versus Paris

Wheat, the biblical staff of life, occupies a unique place in commodity market history. It was wheat trading that started the Chicago Board of Trade (CBOT) in 1848 and created the world’s first futures contract. Traditionally, this contract has been the bellwether for the world’s wheat markets and has traded with limited international competition.

As the U.S. wheat market has been recently losing the prominence it once had, however, a European competitor, the Paris milling wheat contract, has emerged. Despite this, the volume of trade of the CME Group’s Chicago wheat futures market remains far larger than any other in the world even though its role as a viable price discovery and risk management tool may be diminished for global traders.

Independent of the U.S. role in global wheat market dynamics, the type of wheat traded in Chicago may be of limited importance globally. Chicago wheat futures trade SRW wheat, which accounts for 15 percent of U.S. production and 10 percent of its wheat export commitments to date for the 2016/17 crop year. Last year U.S. SRW exports were less than 2 percent of global wheat trade.

The U.S. has ceded its role as the dominant wheat exporter to Russia, Ukraine and the EU, which now largely set the world’s wheat price. Accordingly, the Paris wheat futures market now operated by Euronext has grown in its importance to the global trade. While its volume of trade and open interest has increased, though, the daily trading volume is still only 10 percent of Chicago’s. However, Paris wheat open interest is currently running about 60 percent of Chicago’s, indicating the contract is successfully attracting long-term hedgers and risk managers.

It would seem that Euronext’s Paris wheat futures are a far better and more logical proxy for the world wheat market than Chicago’s. The CME must privately agree or at least recognize the need for a globally-focused contract as it will launch its own EU wheat futures contract on 12 September. The CME EU wheat futures will compete directly with Euronext’s, and the contract details are quite similar. Both trade in 50 MT units priced in euros and are settled via physical delivery of European-grown wheat. The Euronext contract calls for delivery instore Rouen or Dunkirk elevators, although the exchange plans to establish delivery at interior points at price differentials based on Rouen. The CME contract is also priced basis instore Rouen with differentials for interior locations in northern France of which there are a number already lined up. Thus, competition between these two will be based on factors beyond basic specifications.

(This article was originally published in the 11 August 2016 issue of Ag Perspectives as part of the Common Thread column by Robert Kohlmeyer. Click here to find out more about subscribing to Ag Perspectives.)

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