CME seen needing second wind in EU wheat battle with Euronext

PARIS (Reuters) - After a brisk start, falling volumes in CME Group’s new EU wheat futures show the size of the task in challenging Euronext’s established benchmark, making the next harvest key to gaining a foothold in Europe, traders said.

An aerial view shows a French farmer in his tractor making bales of straw after wheat harvest in his field in Coquelles near Calais, northern France, July 21, 2015. REUTERS/Pascal Rossignol/File Photo

The Chicago-based exchange impressed market players by attracting liquidity soon after launching a long-planned EU wheat contract in September, overcoming a first hurdle that has stymied other new agricultural derivatives.

But daily volumes and open interest have since fallen, with traders citing confusing price levels - including a brief price spike on Oct. 26 blamed on a trading error - and CME’s perceived reliance on market-maker sponsors to generate activity.

With incumbent operator Euronext also seeing a drop in activity in recent months after a very poor crop in France, the EU’s top wheat grower, the upcoming 2017 harvest cycle will be an important test for each of the rival contracts.

“The CME launch was a success until October and then liquidity fell as prices rose sharply and no longer reflected market reality,” one futures broker said.

“Attention is going to start turning to next year’s harvest so maybe that will lead grain handlers to have another look at the CME contract.”

Double-digit price premiums for CME versus Euronext confounded expectations that its lower wheat-quality specifications would lead to a discount against Euronext.

Forward positions covering the 2017 harvest show a reversal of this situation, however, suggesting next season may provide a clearer picture of market appetite for the competing contracts.

CME sees encouraging activity spanning commercial and financial firms, Jeffry Kuijpers, executive director, agricultural commodities, at the group, said, noting some Exchange For Physical trades whereby parties exchange futures as part of a physical commodity sale.

“As well as a healthy participation in the contract, the recent deliveries of certificates against the December 2016 delivery month - 65 lots through three approved warehouses -, validate the effectiveness of the contract,” he said.

Its delivery model, using a network of inland silos and offering tradeable storage certificates, has been at the heart of CME’s pitch to European traders, who have criticized Euronext’s reliance on a small number of port delivery silos.

Euronext, meanwhile, has seen its volumes weakened by the worst French harvest in 30 years, which cut the amount of grain needing to be hedged just as futures markets were struggling with low volatility.

“You have to consider this year as totally atypical,” Olivier Raevel, head of commodities at Euronext, said.

Average daily volume for Euronext wheat futures so far this year was about 36,000 50-tonne lots, down 1 percent from last year. This annual trend encompassed a strong start to 2016, a post-harvest slump and a recovery since November, Raevel said.

CME’s daily average to date is running at around 1,100 lots, according to Kuijpers.

Euronext’s extra liquidity is a compelling argument for now.

“The CME EU wheat has not turned out to be one of the futures contracts which were launched and then die with no trade,” a German trader said.

“But I am not moving to it. The great attraction of Euronext for me remains the excellent liquidity.”

For a graphic on CME EU wheat futures, click:

Additional reporting by Michael Hogan in Hamburg, editing by David Evans