Black Sea Corn grows as regional benchmark

Black Sea corn exports have rebounded strongly this year, according to the US Department of Agriculture (USDA). This re-establishes the steady growth in exports observed since 2010/2011. The latest USDA data shows that Russia and Ukraine will produce a record 52.4 million tonnes during the 2021-2022 marketing year. Exports are also expected to reach around 35 million tonnes, an increase of around 10 million tonnes from the prior year.  

Chart 1: Black Sea exports hit record levels

Source: USDA

The latest data from UN Comtrade for 2020 and 2021 (up to March) shows Black Sea corn has been exported to over 60 countries. The largest corn buyers are in Asia and Europe. The top export destinations by volume are China, the Netherlands, Egypt, Spain, South Korea and Turkey. A total of 21.6 million tons of corn was exported from Ukraine to China, Egypt, Netherlands, South Korea, Spain, and Turkey between January 2020 and March 2021.  

Exporters, trading firms, processors, importers and end-users are all turning to the Black Sea Corn futures to manage price risk. This has become increasingly important given the export role that the Black Sea region is playing on the international stage.

Black Sea Corn futures and open interest rise sharply

The Black Sea Corn futures contract is cash settled and reflects the export prices for Ukrainian corn shipped from deep-sea ports. Volumes in Black Sea Corn futures have increased in line with growing hedging interest, boosting the credentials of the Black Sea Corn futures contract as a regional benchmark. CME Group data shows that trading volumes rose 14 percent between January and May 2021 with total volume of 166,500 tons traded compared to the same period 12 months earlier. Open interest, a key measure of success in a futures contract, reached 8,487 lots or 424,350 tons by late mid-July 2021, an increase of 471 percent year-on-year

Chart 2: Black Sea Corn futures volumes rise 14 percent in 12 months

Source: CME Group data

Supply constraints in the Black Sea, partly caused by weather-related issues, have boosted prices. Black Sea Corn futures prices have risen sharply since September 2020, with the front-month futures contract rising from just below $200 to $265 per metric ton by mid-June 2021, an increase of around 32 percent. Despite the higher prices, export demand remains robust with total Russia and Ukraine exports peaking at a record level in the latest 2021-2022 marketing year, USDA data shows.

Chart 3: Black Sea corn prices rise sharply on export demand

Source: CME Group data

Black Sea Corn futures basis spread to benchmark Corn futures affords hedging opportunities

The Black Sea Corn futures contract is available alongside the global benchmark Corn futures contract, offering opportunities for basis (spread) trading. The spread allows the market to take a view on the relative value difference between the Black Sea and benchmark Corn contracts. Buyers of the spread typically would expect the spread to widen with sellers expecting the reverse outcome. November Black Sea Corn versus December Corn futures is one of the most actively traded spreads.

The spread value changes depending on the comparative supply demand outlook in each region and therefore tends to be volatile. The 20-day annualised historical volatility in the Black Sea vs Corn basis spread has traded in a range of 46 to 185 percent. Given the large increase in volatility on this spread, trading firms view this as opportunity to trade the basis between benchmark Corn and Black Sea Corn.  

Chart 4: Annualized historical volatility in the Black Sea vs benchmark Corn futures spread

Source: CME Group

Since October 2020, the spread between November 2021 Black Sea and December 2021 Corn futures contracts has traded in a range of $30 to $80 per tonne, a significant move in a short period of time, and when at $80, was around 30 percent of the underlying outright value of the Black Sea Corn price. Between March and June 2021, the volatility in the basis has increased sharply. Typically, a more volatile market will create additional trading opportunities due to the greater price movements in both the Black Sea and benchmark Corn markets.

Chart 5: Black Sea premiums vs benchmark Corn draw increased hedging interest

Source: CME Group data

Block trade minimum change supports Corn futures basis trade the benchmark

In July 2020, CME Group amended the minimum block spread threshold to permit trades of 100 lots of Black Sea corn (5000 tonnes) vs. 40 lots of benchmark Corn (5,080 tonnes), for a ratio of 2.5:1.1 The change was made to further facilitate spread trading between the Black Sea and benchmark Corn futures. Trading interest is increasing in Black Sea Corn futures, which is helping to establish the contract as a regional benchmark. Trading interest has emerged from within Europe and as far afield as Asia helping to drive increased volumes compared to previous years.


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