Founders say lack of funds, expertise clouds exchange's future
The group of bankers and traders who are backing the country’s first commodities futures exchange, scheduled to open in June, have high hopes that the market will aid farmers and traders alike and, in so doing, take Ukraine’s agricultural sector to new heights.
A number of banks and international commodity traders agreed last January to create the exchange. Once launched, backers say that the exchange will draw 90 percent of all trade carried out on the country’s commodities exchanges.
The futures exchange is a result of an agreement between 44 banks and agriculture and energy companies. Along with Aval Bank and Khlib Ukrainy, founders include commodity traders Ramburs, Cargill, Toepfer, W.J. Export‑Import, Louis Dreyfus and Glencore International.
Halyna Shevchenko, general director of the exchange, called the Ukrainian Futures Market, said that in addition to agricultural commodities, plans are underway to include fuel and transportation services as well.
Shevchenko said the exchange would establish future prices on commodities, enabling both traders and farmers to plan their business in advance. Futures contracts can lower the financial risks undertaken by traders while helping farmers to increase their sales.
“If in the autumn a farmer knows he can lock in the price he will get for his crop in several months, he will be able to plan planting decisions and spending accordingly,” she said. “If he sees that barley prices will be low in six months, he can reduce the area planted in barley or plant a different, more lucrative, crop instead.”
She said the exchange would accommodate 140 brokers, with a seat selling for Hr 50,000. She said that at first the exchange will operate in accordance with the pit auction method used by exchanges in the United States, then later move to an automated system as used in Europe.
Leonid Kozachenko, the exchange’s president and a former vice prime minister in charge of agriculture, said he hopes that turnover at the exchange will reach $200 million during the first six months, and grow to “several billion hryvnas” in two years’ time. He said that the market will trade options in the beginning and will start trading futures contracts by the end of the year.
Shevchenko said the exchange should also boost lending to the industry. She said commitments to purchase a commodity at a certain price in the future should encourage banks to finance sowing campaigns.
Futures contracts are legal agreement to buy or sell a commodity, such as sunflower seeds or wheat, at a particular price on a specific date in the future. The contract specifies the amount, quality and delivery time for each product.
“The exchange’s creation is a very progressive step,” said Cargill‑Ukraine President Patrick Bracken. “It will make market prices transparent and strengthen the state of farmers, traders and sellers.”
He said that recovery in agriculture has become a foundation for the futures exchange.
Shevchenko said officials at the exchange are now developing procedures for certifying grain elevators, a step that would provide traders with guarantees regarding the quality of stored grain.
For the exchange to become effective, however, Shevchenko and her colleagues are pushing for new legislation that would make trading attractive to hedgers and speculators. She said draft legislation submitted to parliament includes amendments to tax laws, creation of a state body regulating futures trading and certification procedures for elevators and exchange participants. Shevchenko said her major hope is that deputies will pass the legislation this spring.
Kozachenko said that the government has been strongly supportive of the exchange.
“Creation of the futures exchange has important political implications,” he said. “A futures exchange is an indicator of the country’s economic development since such exchanges can function only in the market environment.”
He said the government’s growing understanding of free market benefits has played a big role in helping the plans materialize.
“I don’t think that everybody in the government understands that liberalization and non‑interference is the most promising for economic development,” he said. “But there are many fewer opponents to that than there were before. I believe that’s what made the exchange possible.”
Serhy Charchenko, chairman of Ramburs, a grain trader, welcomed the idea of creating a futures exchange but said he was skeptical that the country had the human resources to support the idea.
“Taking into account the experience of Western countries, it is possible to say that futures trade is a positive challenge for Ukraine,” Cherchenko said. “But I question Ukraine’s readiness to make it work. Understanding of the agricultural futures market is close to nil.”
The exchange faces a lack of funds and qualified personnel, Kozachenko said. He said that Cargill, Toepfer and Dreyfus have sponsored training at the Chicago Board of Trade for two Ukrainians. Kozachenko also said that the United Styates’ Commodity Futures Trading Commission has also agreed to provide free training between five to seven Ukrainians.
He said the exchange also hopes to receive financial and technical assistance from the World Bank and the European Bank for Economic Development, as well as from the U.S. and Canadian governments and non‑governmental organizations.
