UKRAINE COMMODITY FUTURES MARKET DEVELOPMENT SURVEY AND ROADMAP RECOMMENDATIONS. June 18, 2015
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1 UKRAINE COMMODITY FUTURES MARKET DEVELOPMENT SURVEY AND ROADMAP RECOMMENDATIONS June 18, 2015
2 Breakdown of Participants Segment Number Agri-producers 821 Grain processors 51 Oil seed processors 10 Cattle breeding farms 102 Domestic traders 50 Exporters 50 Silos/Elevators 20 Banks 29 Insurance companies 10 Investment companies 12 Total 1,155 2
3 Use of Commodity Exchanges Agri-producers Processors No 91.0% Yes 9.0% Supply Chain No 95.2 % Yes 4.8% Traders & Silos No 88.5% Yes 11.5% 3
4 Don t Use Commodity Exchanges Because Top 3 Responses Agri-producers Processors Traders/Silos Our production volumes are too low Heard about it, but don t know how to use it Can t get the best price on it Our requirement volumes are too low High costs involved Not sufficiently liquid Doesn t offer the best price Not sufficiently liquid Too much/complicated paperwork 4
5 Don t Use Commodity Exchanges Because Top 3 Responses Agri-producers Processors Traders/Silos Our production volumes are too low Heard about it, but don t know how to use it Can t get the best price on it Our requirement volumes are too low High costs involved Not sufficiently liquid Doesn t offer the best price Not sufficiently liquid Too much/complicated paperwork 5
6 Don t Use Commodity Exchanges Because Top 3 Responses Agri-producers Processors Traders/Silos Our production volumes are too low Heard about it, but don t know how to use it Can t get the best price on it Our requirement volumes are too low High costs involved Not sufficiently liquid Doesn t offer the best price Not sufficiently liquid Too much/complicated paperwork 6
7 Sources of Price Information Source* Agri-Producers Processors Traders/Silos Traders 58.9% 45.2% 86.1% Internet 55.2% 43.5% 53.3% Neighboring Farm/Similar Entities Specialized Mass Media 39.5% 38.7% 23.0% 21.3% 21.0% 35.2% * % of Respondents answering Yes 7
8 Sources of Price Information Source* Agri-Producers Processors Traders/Silos Traders 58.9% 45.2% 86.1% Internet 55.2% 43.5% 53.3% Neighboring Farm/Similar Entities Specialized Mass Media 39.5% 38.7% 23.0% 21.3% 21.0% 35.2% * % of Respondents answering Yes 8
9 Use of Anticipatory Pricing Contracts Bilaterally Negotiated Forward Contract Marketing Years* Agri-Producers Processors Traders/Silos 2013/ % 8.1% 36.1% 2015/17** 12.6% 6.5% 40.2% Agrarian Commodity Exchange Forward Contract Marketing Years* Agri-Producers Processors Traders/Silos 2013/ % 4.8% 4.9% 2015/17** 6.1% 8.1% 12.3% * % of Respondents answering Yes ** Anticipated use 9
10 Use of Anticipatory Pricing Contracts Bilaterally Negotiated Forward Contract Marketing Years* Agri-Producers Processors Traders/Silos 2013/ % 8.1% 36.1% 2015/17** 12.6% 6.5% 40.2% Agrarian Commodity Exchange Forward Contract Marketing Years* Agri-Producers Processors Traders/Silos 2013/ % 4.8% 4.9% 2015/17** 6.1% 8.1% 12.3% (+138%) (+169%) (+250%) * % of Respondents answering Yes ** Anticipated use 10
11 Futures Contract Use of Derivatives Contracts Marketing Years* Agri-Producers Processors Traders/Silos 2013/ % 8.1% 18.0% 2015/17** 4.7% 6.5% 27.0% Options Marketing Years* Agri-Producers Processors Traders/Silos 2013/ % 8.1% 8.2% 2015/17** 3.4% 6.5% 14.8% Swaps Marketing Years* Agri-Producers Processors Traders/Silos 2013/ % 11.3% 7.4% 2015/17** 3.4% 8.1% 11.5% * % of Respondents answering Yes ** Anticipated use 11
12 Futures Contract Use of Derivatives Contracts Marketing Years* Agri-Producers Processors Traders/Silos 2013/ % 8.1% 18.0% 2015/17** 4.7% 6.5% 27.0% Options Marketing Years* Agri-Producers Processors Traders/Silos 2013/ % 8.1% 8.2% 2015/17** 3.4% 6.5% 14.8% Swaps Marketing Years* Agri-Producers Processors Traders/Silos 2013/ % 11.3% 7.4% 2015/17** 3.4% 8.1% 11.5% * % of Respondents answering Yes ** Anticipated use 12
13 Futures Contract Use of Derivatives Contracts Marketing Years* Agri-Producers Processors Traders/Silos 2013/ % 8.1% 18.0% 2015/17** 4.7% 6.5% 27.0% Options Marketing Years* Agri-Producers Processors Traders/Silos 2013/ % 8.1% 8.2% 2015/17** 3.4% 6.5% 14.8% Swaps Marketing Years* Agri-Producers Processors Traders/Silos 2013/ % 11.3% 7.4% 2015/17** 3.4% 8.1% 11.5% * % of Respondents answering Yes ** Anticipated use 13
14 Interest in Exchange-Traded Instruments Agri-Producers 35% 65% Yes No 14
15 Interest in Exchange-Traded Instruments Farm Definition Survey Small 1k Ha 35% Medium-Sized 1k-5k Ha 60% Large >5k Ha 5% 35% 65% Yes No 15
16 Interest in Exchange-Traded Instruments Think themselves too small Never heard of futures, options Farm Definition Survey Small 1k Ha 35% Medium-Sized 1k-5k Ha 60% Large >5k Ha 5% 35% 65% Yes No 16
17 Interest in Exchange-Traded Instruments Farm Definition Survey Small 1k Ha 35% Medium-Sized 1k-5k Ha 60% Large >5k Ha 5% Medium-Sized Farms more open to new instruments Large Farms more reluctant to move away from existing price risk management techniques 35% 65% Yes No 17
18 Interest in Fixed-Price Contracts Agri-producers Processors No 56.2% Yes 43.8% No 46.8% Yes 53.2% Supply Chain Traders & Silos No 34.4% Yes 65.6% 18
19 Why are you interested? Response Agri-Producers Processors Traders/Silos Offset Market Price fluctuations Facilitates Sales/Purchase Planning Standardized Contract/Uniform Mechanism #1 #1 #2 #3 #2 #3 #2 #3 #1 19
20 Why aren t you interested? Response Agri-Producers Processors Traders/Silos Procedure s too complicated #1 #1 #2 Additional Funds Required #2 #2 Non-binding Contract #3 - #3 GoU Interference - #3 #1 20
21 Use of Warehouse Documentation Agri-producers No 69.4% Processors No 81.9% Yes 18.1% Supply Chain Traders & Silos Yes 30.6% No 44.3% Yes 55.7% 21
22 Indicia of a Defective Market FOB Gulf of Mexico FOB Ukraine transport/handling insurance transport handling insurance port fees demurrage export docs port charges producer price exporter profit producer price exporter pofit 1% 16% <1% 3% 19% 7% <1% 4% 4% 80% 66% Source: Source: FINREP-II Estimates 22
23 Indicia of a Defective Market Wheat Logistics Costs (in USD) Ukraine Germany France Field to Silo Silo to Port Port Logistics Total Source: IFC 23
24 Indicia of a Defective Market Wheat Logistics Costs (in USD) Ukraine Germany France Field to Silo Silo to Port Port Logistics Total Source: IFC 24
25 Indicia of a Defective Market Wheat Logistics Costs (in USD) Ukraine Germany France Field to Silo Silo to Port Port Logistics Total USD28 difference in Logistics Costs Assuming 60MT Annual Grain Crop in Ukraine USD28 x 60 million = USD1.68 billion Source: IFC 25
26 Currencies and Commodities 180% LCY Corporate Debt Capital Markets vs Equity Capital Markets as % of GDP in % Malaysia 140% ECM as % of GDP 120% 100% 80% 60% 40% Indonesia India Russia China Canada Australia 20% Zambia Ukraine 0% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% DCM as % of GDP Source: World Bank, BIS, AsiaBondsOnline.com, FINREP-II calculations 26
27 Commodity Exchange Ecosystem Exchange Platform FOB EXW Prices Brokers Contracts Delivery Process Silos/Wareh ouses Clients 27
28 Recommendations Legal & Regulatory Change 28
29 Recommendations Legal & Regulatory Change Access to Finance 29
30 Recommendations Legal & Regulatory Change Access to Finance Establishing an Informed Commercial Operating Environment 30
31 Legal & Regulatory Change New Derivatives Legal and Regulatory regime that accords with International Best Practices Facilitates development of cross currency and interest rate products Establishes a clearing and settlement regime that is in alignment with EU requirements for CCPs 31
32 Legal & Regulatory Change Exchange Platform New Law On Commodity Exchange Markets FOB EXW Prices Brokers Silos/Wareh ouses Clients 32
33 Encouraging Price Transparency Exchange Platform FOB EXW Prices Brokers Silos/Wareh ouses Clients 33
34 Taxation Exchange Platform FOB EXW Prices Brokers Contracts Taxation Delivery Process Silos/Wareh ouses Clients 34
35 Hedging while local market develops Hedging Solutions... Require NBU administrative changes: Access to Offshore Accounts Ability to freely transfer monies for Initial and Variation Margin payments Need for automaticity 35
36 Access to Finance Exchange Platform FOB EXW Prices Brokers Silos/Wareh ouses Clients Licensing Indemnity Fund 36
37 Access to Finance Financing via Existing Asset Warehouse Receipts (WHR) 1. Supplier 2. Trader 3. Bank Registration of WHR Ownership Cash Silos/Wareh ouses Clients Crop 37
38 Access to Finance Financing via Existing Asset Warehouse Receipts (WHR) Registration of WHR Ownership 1. Supplier 2. Trader 3. Bank Cash Silos/Wareh ouses Counterparty Delivery under a Commodity Futures Contract Clients Crop 38
39 Access to Finance Financing via Anticipatory Asset Agrarian Receipts (AR) Financing via Existing Asset Warehouse Receipts (WHR) AR Central Registry Pledge Registration of Pledge Cash 1. Supplier 2. Trader 3. Bank Cash Registration of WHR Ownership Silos/Wareh ouses Counterparty Delivery under a Commodity Futures Contract Clients Crop 39
40 Establishing an Informed Commercial Operating Environment Privatization and Effective Corporate Management Privatization 40
41 Establishing an Informed Commercial Operating Environment Privatization and Effective Corporate Management Corporate Management Privatization 41
42 Establishing an Informed Commercial Operating Environment Agricultural Associations Agricultural Associations 42
43 Establishing an Informed Commercial Operating Environment Agricultural Associations Agricultural Associations But... Interested in cooperating with other farmers? No 74.5% Livestock Producers Yes 25.5% 43
44 Establishing an Informed Commercial Operating Environment Education Initiatives Natural Hedgers and Speculators 44
45 Establishing an Informed Commercial Operating Environment Education Initiatives Facilitating Institutions Natural Hedgers and Speculators 45
46 Establishing an Informed Commercial Operating Environment Education Initiatives Facilitating Institutions Commodity Futures Regulators (NSSMC) and SROs Affected Regulators and Policy Makers NBU MEDT MAPF Other facilitating institutions Banks Natural Hedgers and Speculators 46
47 Trust The Essential Element Trust 47
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