Managing Black Sea Sunflower Oil Price Risk

Sunflower oil is now the third largest exported vegetable oil globally, behind palm oil and soybean oil. Sunflower oil production and exports are growing particularly in the Black Sea region, with Ukraine (6.2 million tonnes) and Russia (3 million tonnes) exports now accounting for 80% of global world exports of 11.4 million tonnes, according to the US Department of Agriculture (USDA)1 report dated March 2020.

Despite competing with other vegetable oil for food use, sunflower oil prices are driven by different fundamentals than those that affect soybean oil and palm oil, the two major globally traded vegetable oils. Spot sunflower oil prices rose to over $800 per metric tonne in January 2020 (Graph 1) having increased by 18% over a 3-month period before rapidly declining by $100 (12%) in just two months.

This is a market with significant price movements, pointing to a clear need to hedge price risk. Graph 1 clearly shows that there is limited price relationship and correlation to existing futures benchmarks. Based on the data, the correlations for Black Sea sunflower oil are between 25% and 35% (the 12-month correlation figures for the returns are 35% versus Soybean Oil futures and 25% versus Palm Oil futures).

Graph 1: Black Sea FOB sunflower oil price vs Soybean Oil and Palm Oil futures

Source data: CME Group and S&P Global Platts

Hedging Sunflower Oil price risk using Black Sea Sunflower Oil FOB futures

With the launch of CME Group Black Sea (Platts) Sunflower Oil FOB futures2, physical market participants can now effectively hedge their exposure to volatile sunflower oil world market prices.

The main specifications of the contract are:

  • Cash -settled using daily Platts Black Sea sunflower oil physical cash assessment
  • Platts assessments basis Ukrainian raw sunflower oil, FOB Chornomorsk, 3,000 metric tonne parcels, loading one or two calendar months forward
  • 25 tonne contract size, in US$ per metric tonne
  • 12 consecutive calendar months available to trade

Short hedge example - a sunflower oil crusher wants to protect against falling prices

Assume that in August 2019, a Black Sea based sunflower oil crusher agrees with an Indian-based food processor to sell them 25kt of sunflower oil for FOB delivery in December 2019, at market price to be determined close to delivery. The Black Sea crusher is concerned that Black Sea FOB sunflower oil prices will decline between August and December and wants to lock in a price to protect their margin. By using Black Sea (Platts) Sunflower Oil FOB futures to hedge, the crusher can protect against downside price movements in the physical markets and is able to sell forward.

The chart below shows the historical Platts cash market prices for Black Sea sunflower oil FOB Ukraine since December 2018. The example below shows how a sunflower oil crusher could have protected themselves against the impact of falling prices by hedging with Sunflower Oil futures.

Source data: S&P Global Platts

Steps:

  1. In August 2019, the crusher creates hedges (short hedger) against a decline in sunflower oil market prices by selling 25kt metric tonnes equivalent of Black Sea Sunflower Oil FOB December futures at a price of $750/tonne, thereby locking in their FOB sale price at $750. They now hold a SHORT futures position.
  2. In early November, the crusher agrees with the Indian food processor buyer to fix the November physical delivery FOB price of the 25kt of physical sunflower oil. Between August when agreeing to the forward sale contract and early November, the Black Sea FOB futures and physical market price have fallen to $680/tonne for December FOB.
  3. As the crusher has now agreed with his buyer to supply the sunflower oil at $680/tonne FOB Black Sea, he closes out his equivalent short futures position by buying back 25kt of Black Sea Sunflower Oil FOB December futures at $680/ tonne.

Short hedger example cash flow summary

Futures of 25kt (1000 contracts)

Sells December futures @ $750/tonne

Buys December futures @ $680/tonne

Futures gain of $70/tonne

Physical of 25kt

Prices December physical @ $680/tonne

EXAMPLE NET SALE PRICE WITH FUTURES = $680/tonne physical + $70 futures gain = $750/tonne (= December FOB sunflower futures price in August)

Reasons for using Black Sea (Platts) Sunflower Oil FOB futures at CME Group

As well as being able to protect against adverse price movements in the physical sunflower oil markets and buy/sell forward, the Black Sea Sunflower Oil futures contract come with the safety and security of being cleared hence removing counterparty risk.

Key features of the Black Sea Sunflower Oil futures include:

  • Effective price risk management for Black Sea sunflower oil cash markets
  • No physical delivery – cash -settled using Platts assessments
  • Physical booked can be hedged up to 12 months out
  • Price settlements provided by CME Group daily 12 months out
  • Numerous brokers provide access to the market
  • Clearing removes counterparty risk and widens number of counterparties

For more information and details on how to access the contract to trade, please see our Black Sea page.


References

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