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CME Fears Not Upstart Australian Wheat Contract

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Chicago Board of Trade, the world’s largest grain exchange, has no fear of its wheat contract being challenged as the global benchmark for prices by an upstart from Australia, a senior official said Apr. 3.

Australia’s stock exchange operator, ASX Ltd., plans for its hard wheat export futures contract to begin trading in May, opening up the market in one of the world’s top five exporters led by the United States.

“The CBOT serves that purpose today,” Dave Lehman, director of commodity research at the Chicago Mercantile Exchange Group, parent of the CBOT and the world’s largest derivatives exchange, told Reuters in an interview.

“I don’t see that changing,” he added.

The remarks were the first from the CME since the March 13 announcement of the Australian contract, which will cover wheat from top exporting state Western Australia.

Industry players in Australia hope the contract will catch on among the Australian trade and Asian consumers who import high-protein hard wheat.

CBOT trades soft red winter wheat and, while it is not the largest class of wheat grown in the United States, the market is the most liquid among the three exchanges, which also include hard red winter wheat in Kansas City and spring wheat in Minneapolis.

The launch of the Australian contract comes at a time when U. S. traders have criticized the CBOT contract as being “broken” due to a yawning gap in prices for futures and those in cash markets during delivery periods.

This lack of “convergence” in the two prices – blamed on the inflow of index funds that buy for the long term by taking only “long” positions – has been the bane of grain companies and elevators, who use futures to hedge their positions.

In response to the criticism and in a bid to maintain its iron grip on the wheat futures market, the CBOT introduced changes to its contract that included new delivery areas and lower tolerance for fusarium.

U. S. grain traders said they expected strong support for the Australian contract from Asian importers of Australian wheat, who currently hedge their positions at the CBOT.

Lehman said Australia, as a major global exporter of wheat, needed a price discovery mechanism for the grain, but he added that the contract would need liquidity to be successful.

Shawn McCambridge, grain analyst with Prudential Bache Commodities, said he did not expect the Australian contract to pose any significant challenge to the CBOT wheat contract.

“For a contract to be viable, it has to have liquidity. People should be able to put in a position and get out of a position in a timely way,” he said.

He said Asian importers of Australian wheat would likely hedge in their positions in the Australian contract, if there was sufficient liquidity in that market.

Lehman also said CME “welcomed” the Australian contract, adding that it could prove to be beneficial to the Chicago exchange on arbitrage trades between the two.

Lehman said the Australian contract was more aligned to the hard wheat traded at the Kansas City Board of Trade.

A KCBT spokeswoman said last month the exchange did not see the need for the Australian contract, adding KCBT has been an “established benchmark” for hard red winter wheat for 133 years.

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