Once upon a time in Chicago, or Analysis of exchange trends from a trader’s perspective




In recent years the mutual influence of Black Sea region and global agriproducts increased following the increase of agriproduction in Ukraine in particular and Black Sea region in general.

What are the main consistency in the correlation of trends in Black Sea agriculture segment and commodity exchanges? Does analysis of exchange trends can forecast the development of the physical market, and how reliable will it be? And in general what is an exchange, why is it needed and what for it can be used, and is it available to any market participant?

These questions and more APK-Inform Agency asked Ivan Cherevko, Executive Partner with Agromanagement.

- Ivan, you have worked in physical trade of grains and oilseeds for a long time, but recently decided to try an exchange trade. Why?

- I started studying the trade at the exchange while I have been involved in physical trading. The tendencies of prices on both the commodity exchange and physical market always come together. The rate of correlations can change, but it is still high. Thus, every trader at a physical market of grains must understand the fundamentals of exchange trade. There are two types of traders on the exchange – those who insure their price risks, and those who speculate. While trading, we have always been a part of exchange in order to control our price risks. But it is impossible to insure the trade of physical products from the dishonest suppliers, which is already a great experience for me. There is no such risk at the exchange and the speculative feature is the same. This is what always appealed to me in exchange trade. Thus right now I’m focusing on development of this direction greatly.

- How difficult is it to become an exchange player? Is it worth trying? Have your expectations been met?

- Exchange is not a casino and the participants are not players, who place bets, pushing their luck. Thus, foremost it is necessary to understand the market in general and products you trade in particular. Also, it is necessary to set a goal for your work at exchange – whether it is risks insurance or speculative profit. In order to trade on the exchange, it is necessary to open an account in broker company, which has an access to the necessary exchanges – CBOT and MATIF. There are many broker companies and each of them has their level of services and prices. Some provide you with a lot of analytics, and some simply give you a possibility to trade. The requirements to open an account in broker company can be different but in general it is not difficult for both legal and private entities. It is absolutely necessary thing to do, but it is important to understand clearly what is your goal. This can be risk hedging, short speculation or simply and investment to the agricultural product, which as any other exchange product can be the subject of long-term or medium-term investments. And, considering all these, you form your principles and rules to achieve a goal.

- What is a main difference between the physical market and exchange market trade? What are the risks of exchange trading?

- The exchange is an honest market which is a main advantage. There is no unreliable counterparty, no disagreement in quality, etc. Also, it is highly liquid market where there is a possibility to buy or sell the product at any second. But it important to understand that exchange prices are much more volatile than physical market prices, thus it is necessary to understand the behavior phycology of market participants.

- What are the main principles of the successful trade on the exchange? Do they differ from the physical market?

- It is a nice question! I believe that while trading on the exchange you must set the comfortable principles of trade for yourself and adhere to them. For example, if you aim to speculate, you must trade those products you understand. To calculate the budget precisely for the exchange position to avoid emotional decisions, but at the same time to have an understanding of the loss and profit points. If you aim to hedge the price risks, then you absolutely should take into consideration the correlation of exchange and the physical prices and to understand that principles are different here. For now, the Black Sea wheat and corn futures on the commodity exchange are comparatively not totally liquid, and I do not really recommend Ukrainian producers to hedge the price risks at the exchange.


- Despite the trade on exchange being 99.9% virtual, the factors influencing the price formation are mostly fundamental. Excluding the speculative activity, what key trends and factors would you separate in 2019/20 MY?

- During the first half of MY the markets of both wheat and corn were developing in a classic way. Ukrainian farmers are quite fond of classic development of prices. Moreover, in the second half of MY, the prices for wheat, apart from corn, have not “suffered” from the global pandemic and were more sensitive to weather factor, which has been already affecting the season-2020/21. Since March 2020 the prices for corn were significantly affected by the COVID-19 pandemic development. As corn is a feed for bioethanol and biodiesel, the prices were also under influence of crude oil prices trends and dispute between China and the USA. Such different factors of impact for the products led to the disparity between the prices for wheat and corn by the end of the season. Even more, the price trends for wheat at Paris and Chicago commodity exchanges could be mixed because the influence of weather conditions depends on the region.

- Please, share your expectation of the new season-2020/21. What should the market participants pay attention to in the new season?

- The season has started with undetermined balances of production and consumption, and also under the strong influence of weather factors. In the current MY it is obvious that the grain production in the US and in the world will be significantly higher compared to previous 4 seasons. At the same time the consumption during the season can change significantly, depending on the crude oil prices and relationships between the US and China. Looking at the current balances, the global ending stocks are expected to be the lowest in 5 years because of the high consumption. Also, the important weather period for corn has not finished yet which, in its turn, can potentially support the prices. Hence, I believe the price dynamics for corn in August and even in the end of July can be positive. Moreover, the global production of wheat is forecasted to increase significantly, however it is going to decline in the USA, the EU and Ukraine. As a result, the global ending stocks of wheat can be the highest for 5 years, but in the US – lowest for 5 years. Thus, the spread between the prices for wheat and corn will be high during the season. The influence of weather for price dynamics (especially in terms of price support) on the global market of wheat has diminished significantly, thus I still expect the prices to decline in the course of harvesting.

- What tools do you use to simulate and forecast the development of events? Are these set-ups applicable to the physical market?

- In order to forecast the dynamics of prices on the exchange, I use technical and fundamental analysis. In terms of fundamental analysis, I take into account global S&D balances and everything that affects them, as well as weekly USDA exports reports, crop status, the progress of the harvest campaign, etc. Using the data extrapolation method, I predict further price movement. The positions I occupy are shorter-term (several days), therefore weekly reports, weather news and local balances revisions are very important. Technical analysis helps to identify entry and exit points. However, such short-term factors have little effect on physical prices. In addition to fundamental factors such as balances and weather, physical prices are influenced by producer sentiment and traders' trading books. For example, there were many sales of wheat from Ukraine with delivery in July, but the manufacturer is holding back sales in the first half of this month, which supports prices.

- You trade wheat, corn and soybeans at Chicago CBOT. Can you tell us Your observations concerning the analysis of global trends in the context of these crops (what is in common, what are the differences, what is the level of mutual influence, which crop has higher premium, what has higher risks, etc)?

- Soybeans are the most expensive products among those you mentioned, and it is one of the most volatile and difficult to forecast, thus I trade it depending on the situation. Wheat and corn have some historical mutual dependence, but you must understand that CBOT exchange mostly depends on balances and new in the US. Apart from the physical market of Ukraine, the prices for corn at CBOT can receive state support in case of deep fall.


- The agricultural market of Black Sea region is an integral part of global market and is largely subject to changes in the exchange. As the agriproduction in Back Sea region grows as well as its role on the global market, how much has the degree of its influence on commodity exchange trends increased?

- You are absolutely correct. The market is globalized, and Black Sea region in general and Ukraine in particular are the powerful players. From year to year, I can see the growth of attention to Ukraine as to global agrimarket part. The global traders follow closely the weather in Ukraine, yield of main crops, etc. At the same time the domestic traders and producers should also watch closely the trends on the global market and understand that prices are formed not only based on the production in one or another region of the country.

Speaking of the region in general, it is the biggest exporter of grain in the world and is one of TOP-3 exporters of corn. The impact of these product trends is enormous. The market closely monitors yield forecasts and other changes in the agricultural sector of the Black Sea countries. It is noticeable that analysts of international companies sometimes know better was yield is forecasted in Ukraine that our own ministry.

- In conclusion, thank You for such an interesting conversation and we’d like to ask You what are Your expectations regarding the further development of events and say a few words about the company's plans.

- Currently Agromanagement company is actively raising capital to work with these exchange tools. We conduct trading at the exchange through the world's largest broker. A separate segregated account is opened for each client, designed to store the client's funds separately from the capital of the broker and the management company, which makes it easy to control the actions on the account and makes it possible to track the result. We are open not only to clients from agribusiness, but also to everyone who is interested to receive an alternate profit. We are aimed at increasing the trade volumes by promoting the agricultural exchange tools and strictly following the trade rules. 

Interviewed by Anna Tanskaya