(Wall Street Journal) – A key futures contract that helps set the price of grain has hit a roadblock: three full wheat silos in France.
The silos store the grain that underpins Europe’s benchmark wheat futures contract, where people buy and sell wheat for delivery at a specified future date and price. But the three silos where this wheat has to be delivered are full, meaning that holders of these futures contracts, known as Matif, can’t cash in by delivering the wheat. Instead, they have to roll their holdings over into contracts for later delivery.
The snarled delivery system has consequences for French farmers struggling to compete against cheaper Ukrainian and Russian peers, for traders stuck with large futures bets and even for the exchange that runs the contract, Euronext NV, as it fends off competition from U.S. rival CME Group.
Perversely, amid a glut of wheat, the blockage may cause wheat futures prices to rise, making European wheat even less competitive. That is because those traders unable to make delivery will be forced to buy back the contract and roll it into a new one.
“We need to get Matif working in a better way,” said Hans Stoldt, director of trading house Ameropa SA, who believes that the contract should offer more flexible delivery options.
The silos’ owners, Groupe Soufflet, Sénalia and Nord Céréales, closed down the three facilities in the French ports of Rouen and Dunkirk in recent days because they can’t take in any more wheat.
These three are the only silos authorized by Euronext NV to handle shipments under the Matif contract. Commodities futures typically have mandated warehouses, tanks and silos into which the underlying product is delivered once the contract has expired.
The Matif contract is used to help price wheat in Europe, which is the world’s largest grain producing region. Daily volumes averaged 36,231 contracts a day in 2015 through October, up 9% from last year, exchange data shows.
Most market participants use the futures markets for hedging, or protecting themselves from unexpected swings in prices, or for speculating on future price movements. But the physical grain that underpins the market can be bought and sold when a contract expires.
Now, any contract holder planning to sell their wheat, as a way of positioning for a drop in prices or shifting their portfolio, may be unable to make delivery.
Thanks to the silo closures, a trader who expected prices to fall and had been planning to make a sale of physical wheat to lock in the higher current price may be forced to abandon a potentially profitable trade. Traders say that this means they have little choice but to buy back the contract and “roll” it into a new one.
“It’s annoying because there are erratic movements on the futures contract which are not necessarily reflecting the fundamentals,” said one Dubai-based futures trader who declined to be named.
In particular, the closures could put upward pressure on near-term prices, making European wheat even less competitive, traders said. The contract’s troubles have been cited as being one of the factors behind an increase in the grain price of 0.7% to €177.50 ($189.91) a metric ton since the last closure was announced Monday.
Olivier Raevel, head of commodities at Euronext, said that market participants would like there to be more delivery silos, particularly outside France.
“I would rather see them [the three silos] open, but a situation where storage space is scarce is not entirely out of the ordinary,” he said.
Mr. Raevel says Euronext is keeping an open door for any facilities that want to be designated as a delivery silo, but many don’t, while others are too remote or small for big shipments.
The plan, though, has been delayed as CME tries to convince French grain store operators to sign up to a network that would rely on U.S. futures contracts regulations, traders said.
“We continue to see Europe as an important wheat market and are actively engaged with market participants,” a CME spokesman said. The spokesman declined to discuss further details.
For farmers the grain snarl up reflects a wider problem. Wheat exports from France, the continent’s grain powerhouse, were down 3.3% in the three months through September from the same period a year earlier, customs data shows. Weak demand from overseas will leave France holding stocks of 5.2 million tons of wheat at the end of the marketing year, more than double the previous year’s figure, according to the latest estimates from FranceAgriMer, the government’s agricultural agency.
Egypt, the world’s No. 1 wheat importer, has bought 1.5 million tons of Russian wheat in its closely watched state tenders so far this marketing year, compared with 240,000 tons of French wheat—as much as it bought in a single purchase in January.
