Wheat revamp, IPO give Euronext breathing space as CME mulls move

Fri Jul 4, 2014 7:43am EDT

* Euronext's wheat futures are price benchmark in Europe

* CME Group's EU plans tap into trade gripes about Euronext

* CME threat, IPO may shore up Euronext's incumbent role

By Gus Trompiz

PARIS, July 4 (Reuters) - Euronext should be able to fend off an incursion by CME Group Inc into the European wheat market as long-awaited changes to its wheat futures and support from new shareholders cement its advantage as incumbent operator, traders and analysts said.

Euronext's Paris-based milling wheat futures <0#BL2:> are a benchmark for the European market. Traded volumes in the futures have grown rapidly in the past decade as volatility in grain prices drew hedgers and speculators towards derivatives, and as a boom in European wheat exports raised the profile of the region on the world market.

This transformation has attracted CME, the world's biggest futures exchange and owner of the Chicago Board of Trade (CBOT), towards Europe in what is the biggest competitive threat to Euronext's wheat market since its creation in the mid-1990s.

"Europe has become a hub for wheat production, with its very consistent output. When there are weather problems in the world, people fall back on Europe," said Thierry Pouch, head of research at farming advisory body APCA in France.

"This has a major bearing on its derivative markets and makes them an attractive target," he said.

CME last month confirmed it is considering either developing its own western European wheat contract, or partnering with Euronext, with a promise of more physical delivery points and incentives to store grain.

The Chicago giant's pitch addresses one of the main grievances about Euronext, that its model is skewed by the use of a single delivery hub - a set-up suited to French grain producers and not the market as a whole.

CME's message plays well with operators critical of slow progress in adapting Euronext's contract to market changes. Traders also hope competition would push down trading fees.

CME is set on Europe, as shown by its plans to launch cocoa futures in London, and Euronext may face other rivals as law makers push business currently done off exchanges onto regulated platforms.

INCUMBENTS HARD TO DISLODGE

Euronext, however, has a headstart as the entrenched operator in a sector where new derivatives struggle to exist.

CME's Black Sea wheat contract <0#BSW:> is one of several agricultural markets that have failed to take off.

Those who criticise Euronext's milling wheat market as too French and too rudimentary in its specifications recognise that simplicity has brought vital liquidity.

"More delivery points outside France and a more pan-European view would be welcome. But the great advantage Paris has is the liquidity. You know you will be able to sell and this is a major plus point for the Euronext market," a German trader said.

Traded volumes of Euronext's wheat futures and options rose from less than 500,000 contracts in 2006 to a record nine million in 2012. This year, a crisis in grain exporter Ukraine fuelled record weekly activity in March for Euronext's commodity products.

CME's scale is still far superior across agricultural commodities with a million contracts traded daily, powered by corn and soybeans. But in wheat Euronext is now a credible alternative to the main Chicago wheat future <0#W:>, the world's benchmark.

PROTEIN NEXT TEST FOR EURONEXT

CME argues that large players in Europe are accustomed to using its products. But some traders say the delivery model vaunted by CME is too much of a leap for European operators.

According to traders, CME is promising a system of storage fees and certificates to encourage silos to participate and ensure forward prices reflect the cost of holding grain.

The European market is also seen as too small for a newcomer and some worry that a new wheat contract could do more harm than good.

"The worst thing would be to end up with two European contracts," a futures broker said. "If investment funds see that neither has liquidity they won't bother and will stick to the U.S. market."

Some traders say CME's contract move is a tactic in a broader plan to take over Euronext's wheat business. But Euronext's spin-off from IntercontinentalExchange, in which shareholders were gathered to ensure European control, may preclude that.

Terms of the Euronext IPO stipulated that a group of European institutional investors took a 33.4 percent stake in the market operator at a 4 percent discount to the IPO price, designed to allay local regulators' concerns that the pan-European bourse could be snapped up by another foreign firm.

CME has played down the potential for a takeover bid for Euronext's wheat business, stressing the idea of a partnership like the one it has with Bursa Malaysia, a benchmark for palm oil prices. Yet Euronext has signalled its own international ambitions in a cooperation agreement with China's Dalian Commodity Exchange, another key oilseed venue.

Euronext's plans to launch in the year ahead a new contract calendar and two new delivery points could also quell discontent among operators just as CME is courting them.

Talks over adding a protein level in Euronext's wheat contract, prompted by French efforts to raise grain quality for export, will be a fresh test for the exchange.

"The market's basic wheat standard is evolving and the future of Euronext's contract could be at risk if it lags behind," another futures broker said. (Additional reporting by Valerie Parent and Michael Hogan; editing by Keiron Henderson)

FILED UNDER: