After boom, change beckons for Paris wheat market

Wed Nov 28, 2012 9:18am EST

* Volatility-fuelled growth brings user, regulator demands

* Changed U.S. market hours, French silo row add to pressure

* Consensus culture, healthy volumes may mean gradual change

By Gus Trompiz

PARIS, Nov 27 (Reuters) - A new release time for the world's most closely watched crop reports and controversy over a silo in France's top grain port could hasten a further transformation of the Paris wheat market, as it grapples with a fast changing trading landscape.

Driven by dramatic weather-fuelled price swings in the past five years, Paris-based wheat futures , operated by NYSE Liffe, have emerged as Europe's benchmark wheat market and a credible counterpart to the Chicago Board of Trade , the world's biggest grain exchange.

This success has brought pressure from operators and regulators to adapt the initial design of the Paris market, tailor-made for the French grain sector in the 1990s, to suit a broadening international base of commercial and financial users.

Futures markets allow operators in the grain sector, from farmers to food manufacturers, to buy and sell in advance at a certain price, thereby covering themselves against the sort of weather-related supply volatility that has been exacerbated in recent years by tightening global grain supply.

NYSE Liffe, whose Paris-based grain futures market is often referred to by its former names, Euronext and Matif, said this month it may extend trading hours from January and is reviewing its flagship wheat contract to meet user needs.

"The Paris milling wheat contract has achieved a certain maturity," Jean-Loic Begue-Turon, head of derivatives at InVivo, France's largest farm cooperative group, said.

"The criticism you can make is that there is not enough liquidity at a time when the desire to hedge risks is increasingly strong."

In the first 10 months of this year, total volume for Paris wheat futures was up 21 percent compared with the same period a year earlier, NYSE Liffe reports.

With average daily volume of 28,000 lots of 50 tonnes each, January-October volume represented about 300 million tonnes, or more than twice the European Union's annual wheat output. But this is still modest versus an equivalent of over 3 billion tonnes traded in Chicago wheat futures in the same period.

Longer trading hours are seen as a way of making the market more liquid, as this will cater to players outside western Europe and also help two-way trading with Chicago.

Near-24-hour trading in U.S. futures and a change in the time of the U.S. Department of Agriculture's (USDA) closely scrutinised supply-and-demand reports - which from January will come out just half an hour before the close in Paris - have supported calls for longer hours.

"There has been a genuine internationalisation of the milling wheat contract so expanding trading hours is important," Michel Portier, head of French consultancy Agritel, said.

CONSENSUS CULTURE STRAINED

But while operators tuned into world markets fret about a frenzied final half hour of trading after USDA reports unless Paris hours are extended in the evening, some commercial players are pushing instead for an earlier start, in an echo of divisive debate in Chicago over trading hours.

A controversial change in the quality requirements of Senalia, the operator of a silo at Rouen port that is the sole delivery point for Paris wheat futures, has shed light on other aspects of the market that players say are outdated.

Some cite limited delivery capacity as leaving the market prone to erratic prices before the expiry of contracts, while others complain about an unbalanced contract calendar.

"The biggest issue for us is the gap between the May contract and the November one," Rory Deverell, commodity risk manager at INTL FC Stone Europe, said, referring to what are respectively the last and first contracts of the crop year.

The long gap between contracts was keeping some farmers and exporters out of the market, unable to hedge future deals against volatile cash prices.

But a culture of adjustments based on consensus among the core French membership, coupled with healthy growth, will likely favour step-by-step changes and disappoint some in the market.

"Consensus is good but reactivity is very important," one futures broker said. "The problem is that Euronext doesn't have real pressure on it - they are growing very nicely."

Regulatory scrutiny, as authorities seek to curb market volatility, has also added pressure to NYSE Liffe.

This comes as financial players like banks and investment funds gain more influence in the Paris futures market, even if the absence of position reporting makes their size unclear.

"We were a very French market until about three years ago. Now there are banks and funds that are present worldwide," another futures broker said. "I see the financial part of the volume at well over 10 percent."

NYSE Liffe has in the past year introduced "Commitment of Traders" reports for its London soft commodity and feed wheat contracts and plans to do the same in Paris from 2014, a move firmly backed by users frustrated at a lack of transparency. Such reports break down the involvement of different types of operator within the market.

The exchange introduced this month delivery position limits for its soft commodities in London, extending a policy it has in Paris and which it hopes will satisfy upcoming EU market rules.

A separate French bank reform effort is considering ring-fencing banks' proprietary trading and limiting high-speed trading. But a single-country law would have scant impact on an increasingly international Paris market, traders say.