Euronext Expands Commodity Derivatives

Shanny Basar

Euronext is launching sugar futures this autumn, before quotas are abolished in the European market, as the exchange continues to grow its commodity derivatives franchise.

The pan-European exchange operator is launching sugar futures, subject to regulatory approvals, ahead of the European Union abolishing sugar production quotas on 30 September 2017. The European Union is the third largest sugar producer and the second largest consumer in the world according to Euronext. Sugar futures can already be traded on rival exchange ICE, the former owner of Euronext.

Nicholas Kennedy, head of business development, commodity derivatives at Euronext, told Markets Media: “Our sugar contract is targeted at the intra-EU trade flows rather than global exports and is priced in euros as opposed to US dollars.”

The new contract is aimed at allowing the EU sugar sector to manage risk more smoothly in a transparent, regulated and liquid market. Kennedy added that the majority of sugar beet producers are also wheat producers and so are familiar with the Euronext futures markets, as are the end users of sugar such as food manufacturers.

“When we launched wheat contracts the challenge was to familiarise users with these tools,” said Kennedy. “The contracts are now mature and have become the global pricing benchmark for European wheat with more than two million tonnes traded on our platform every day.”

Last July Euronext milling wheat futures starting trading on the Johannesburg Stock Exchange. “We signed the partnership with the Johannesburg Stock Exchange because the local community wanted exposure to European wheat,” added Kennedy. “If there are similar needs, we would look at other agreements.”

Euronext has previous experience of launching products as the EU has reformed quotas in other commodities such as oilseeds, grains and dairy. Milk quotas for the European Union expired on 31 March 2015 and Euronext launched a dairy derivatives complex for butter, skimmed milk powder and whey powder.

“After dairy quotas were lifted last year dairy production in the Netherlands grew by over 10%, and the milk production figures for November 2015 show a 48% increase over November 2014,” added Kennedy. “The removal of quotas led to a real increase in production and we expect the same for sugar.”

Michel Portier, chief of European agricultural consultancy Agritel, said in a statement: “In a context of liberalisation of the European sugar markets, sugar beet producers will be free to increase their production. Europe will immediately become a net exporter of sugar and the actors involved in the industry will need tools to hedge their risk.”

As the European Union has increasingly favoured environmental energy policies Euronext launched both rapeseed meal and rapeseed oil futures and options to cover the bio-diesel sector in November 2014. Seven months later the exchange said it had reached key milestones for the contracts’ growth. On June 15 2015 open interest, average daily volume and month-to-date ADV passed critical liquidity thresholds.

Euronext also launched wood pellet futures last autumn. Wood pellets are manufactured from stem wood and untreated residues from the wood processing industry to provide a sustainable source of renewable energy.

In third quarter results last year Euronext said trading in commodities products increased by 21.2% from the third quarter of 2014, which the exchange said was boosted by the early July European heat wave that produced uncertainty over the harvest campaign and increased volatility. Euronext said: “It is worth mentioning that the implementation of a new calendar of expiries, replacing the single November expiry by two expiries, one in September and one in December contributed to a frontloading of volumes on a comparative basis.”

However in December 2015 the average daily volume on commodities derivatives decreased by 45% year-on-year. The exchange said the yearly average daily volume was 8% higher than in 2014.

Featured image by jedsadabodin/Dollar Photo Club

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