World’s Biggest Derivatives Exchange Is Getting A Boost From Trade War

(Bloomberg) -- First it was a drought in Russia, the biggest wheat exporter. Then dry spells struck European and Australian crops. And to spice up the mix, Donald Trump started a trade war with top soybean and pork buyer China.

That all added up to a volatile cocktail that brought trading back to life, benefiting the world's largest derivatives exchange CME Group Inc. The Chicago-based owner of global contracts from soybeans to wheat and hogs has seen average daily volume of its agricultural complex rise to the highest since at least 2008.

The extent of weather disruptions and the tariff tit-for-tat that choked Chinese demand for American soybeans came as a surprise for many traders after years of bumper crops that depressed prices and constrained volatility, limiting volume growth for CME's agriculture contracts.

“The whole situation with China is not the kind of thing you plan ahead and say ‘this is going to happen', but when it happens, it has a tremendous impact in the marketplace,” Tim Andriesen, managing director of agricultural commodities at CME, said in an interview in Chicago.

“You also had some production problems in Argentina and Australia,” he said. “So you've seen these risks come into the marketplace and when there's risk, people hedge."

The average daily volume in CME's agricultural futures and options -- which also include corn, dairy and livestock contracts -- rose 13 percent to about 1.56 million contracts in the year through September. The increase compares with 1 percent the previous year and 6 percent in the same period in 2017. CME shares are up 24 percent this year, the best performance among rival exchanges tracked by Bloomberg.

Agriculture's not the only CME market benefiting. Trading in the exchange's Midwest aluminum premium contracts jumped 24 percent this year as U.S. consumers rushed to lock in supplies after Trump slapped tariffs on imported metal.

Trading volumes in copper -- a bellwether for the global economy -- were up 35 percent in the first nine months of the year, the most for the period since 2012.

Copper prices have whipsawed as a rare spell of harmonious growth in the world's major manufacturing hubs seen at the start of the year started to break down, giving way to rising fears about the fallout from Trump's trade war with China. The volume increase also came as activity in the London Metal Exchange slowed, with users turning against higher fees.

Trading in copper has also been helped by options, Young-Jin Chang, global head of metals products at CME, said in an interview earlier this month.

In agriculture, volume also got a boost from trading in Europe and Asia. On April 4, the bourse recorded an all-time high in trading for futures and options outside U.S. hours.

“We came into the year expecting things to be reasonably slow -- the fundamentals weren't set up for a lot of excitement," Andriesen said. "I don't think anybody anticipated the way the year would play out."

While investment funds and other financial participants have been attracted by the volatility, contracts have also seen a rise in open interest, a sign hedging activity has increased.

The CME's agricultural complex reached record open interest of 10.1 million contracts on June 19 and record volume of 3.2 million futures and options the same day. That came just 13 days after record open interest for corn of more than 2 million contracts.

“We've definitely seen some growth in the hedge fund and in the asset manager sector in terms of interest in agriculture products,” Andriesen said. "But as you are seeing open interest build, particularly over a growing season or a shipping season, that's typically indicative of commercial participation."

--With assistance from Mark Burton.

To contact the reporter on this story: Isis Almeida in Chicago at ialmeida3@bloomberg.net

To contact the editors responsible for this story: Tina Davis at tinadavis@bloomberg.net, James Attwood, Patrick McKiernan