How CME's Product Team Cleared the Black Sea Grain Trade

The Black Sea grain export region, once the fastest growing in the world, had little price risk management before 2017. Exporters and trading houses relied on bilateral contracts with full counterparty credit risk, no margin, and no anonymity. If a counterparty failed, the exporter was left holding the bag. Alternatively, they could hedge with Chicago wheat futures, which were liquid but tracked American crop conditions, not the Black Sea market.

The relationship between Chicago and Black Sea prices fluctuated, causing issues when futures positions moved against exporters. In December 2017, CME Group launched Black Sea Wheat FOB (Platts) and Black Sea Corn FOB (Platts) futures, settling for 50 metric tons each. These contracts were cash-settled against an independent price reporting agency instead of physical delivery, eliminating the need for delivery points, grading, storage, inspection, and the associated complexities.

By cash settling against a published assessment and clearing positions, the contracts converted credit relationships into margin relationships, mitigating counterparty risk. The contracts were adopted rapidly, with 465,000 lots traded between December 2017 and June 2020, representing approximately 23.2 million metric tons of wheat.

The corn contract experienced slower growth but saw a 25% increase in 2020. The user base consisted of producers, exporters, trading houses, and processors from Europe, the United States, the Middle East, and Asia, primarily hedgers with genuine physical exposure. However, when Russia invaded Ukraine, sanctions were imposed, and the export flows became unpredictable, rendering the underlying assessment unreliable.

CBOT suspended the Black Sea futures and options in August 2023, as the contracts had become obsolete due to the disappearance of the assessable market.