By Dr. Alexander Belozertsev

Six months ago, the Russian Union of Grain Exporters (RUSGRAIN Union) formally proposed to President Vladimir Putin the establishment of a BRICS Grain Exchange. BRICS is an acronym for its charter members — Brazil, Russia, India, China and South Africa.

Russia is chairing the BRICS organization this year, which is why the Russian government is trying to formalize this proposal and drive it forward. Initially, the idea was not solely developed by the RUSGRAIN Union but borrowed from the organized commodity market experts.

At this point, the RUSGRAIN Union has created what could be described as “political hyperbole,” as there is very little substance to the proposal. It only consists of general statements and some ideology, but no conceptual and methodological background. The global grain community needs clarifications on this initiative, namely the challenges it must overcome and what the plan is to address those challenges and bring this proposal to fruition.

Fundamentally, the initial five BRICS countries occupy a unique position in the world grain economy, being among the biggest producers and consumers of grain and grain products (rice, wheat, corn and barley). Several of them are also among the world’s leading grain exporters and importers.

China and India produce and consume more than 50% of global rice output. Moreover, China is the biggest grains and oilseeds importer in the world (maize, soybeans, wheat, barley, sunflower seeds, etc.), trying steadily to feed its population of 1.5 billion. China, India and Russia are the top three producers of wheat, comprising more than 42% of global production. Russia is the world’s top wheat exporter and among its three biggest grain exporters. Brazil and South Africa are stable grain exporters (maize, soybean, wheat), and have a significant influence on the world grain trade. Newly accepted BRICS countries (Egypt, Ethiopia, Iran, Saudi Arabia and United Arabic Emirates) also play a significant role in the world grain market as major importers of grain and grain products.

The BRICS countries are trading grains not only between themselves; their grain operations are highly integrated within the world market. For instance, China — the biggest grains consumer and importer in the world — actively purchases corn, wheat and soybeans from Australia, Argentina, Brazil, the European Union, Russia, South Africa and the United States. Brazil and Russia export grains to more than 100 countries. India and South Africa trade grains with various grain suppliers and consumers.

Paying no attention to the outstanding positions of the BRICS countries in the world grain balance, price formation of their grain exports and imports mostly is based on the widely accepted price indicators (benchmarks) produced by the well-known grain derivatives exchanges of North America and Europe. That’s why world grain prices are still mainly denominated in US dollars and cash settlement is executed in US dollars as well. Presumably, the BRICS countries experience some discomfort not only in price formation of their grain exports and imports, but also when they try managing their price and currency risks in the world grain market.

Having remarkable commercial grain flows, these countries have begun talking about more transparent and fair grain trade based on their own benchmarks and hedging instruments. It is presumed that the development of their own organized grain market could help to denominate their grain operations, mainly in BRICS currencies and to support the introduction of a common BRICS currency. This is really a unique and challenging task that requires some conceptual decisions, a relevant business model, and highly focused implementation steps and activities based on strong political will, in-depth knowledge of how a modern organized commodity market works, and a complex approach.

However, success is not guaranteed as such an exchange (if it is established) would not be an isolated market and would operate in a rather competitive international grain business environment. There is still a lack of understanding about where such an organized marketplace should be located, who will be members of the exchange, how it would function (cash/spot or derivatives market), and how it would be managed.

The idea of the BRICS Grain Exchange was announced by the RUSGRAIN Union in December 2023, and it was publicly presented to President Putin in March 2024. This is 100% Russia’s political initiative and has not yet been adopted by the other BRICS countries.

The way Russia’s initiative initially was formulated and presented appears to be just a bluff without any practical foundation. The RUSGRAIN Union staff does not have any qualified expertise in organized commodity markets, and the Russian government decision-makers still have a misunderstanding of how a modern grain exchange operates. There has been no in-depth feasibility study, no concept paper, and no economic background provided yet.

That’s why when Russia’s initiative was presented at the 14th Meeting of BRICS Agriculture Ministers in Moscow on June 28, some ministers reserved comment on the proposal. The initial proposal has been overloaded by general statements and controversial ideas providing the following arguments for its establishment: to stabilize agro-product supply and demand; to secure existing supply chains; to build BRICS food security; to control grain prices; and, finally, to fight against the world grain speculators, ignoring the fact that speculation is an essential part of any successful grain exchange. There was no word about an increase of mutual grain trade efficiency, the establishment of a more transparent and adequate price formation system, the development of efficient grain price risk management services. Moreover, in the initial statements there were no signs of enhancing mutual grain trade under the BRICS umbrella, reducing transaction costs and diminishing grain price risks.

Currently, Russia’s initiative is only a general proposal without any in-depth feasibility study and/or business plan. There is no business model proposed (cash/spot or derivatives), no idea of which grains would be traded and in which currency trades will be denominated, no place of incorporation, no key technological solutions, no implementation steps and deadlines, etc.

The peculiarity of this initiative is that it came from a country that does not yet have a modern (futures and options) grain exchange. Yes, Russia is the world’s top wheat exporter, but it still uses world wheat benchmarks (CME/CBOT, Euronext) when exporting its crop. It’s like a country that doesn’t have a Mercedes plant proposing to its political partners to produce Mercedes cars without having any Mercedes involvement and technology.

Moreover, four other BRICS countries (Brazil, China, India and South Africa) already have made significant and tangible progress in the development of their own advanced grain exchanges. Some of them, such as the Brazilian Mercantile and Futures Exchange, Dalian Commodity Exchange in China, Multi-Commodity Exchange in India, and South African Futures Exchange under the Johannesburg Stock Exchange umbrella, are already actively competing with the leading agricultural exchanges in the world. Strategically and technologically, all these exchanges are far advanced in agricultural commodity derivatives trading compared to their Russian rivals. Do they need Russia’s initiative to be implemented under the BRICS umbrella now?

A combination of factors, including the consequences of the COVID-19 pandemic, war in Ukraine and disruptions of the Black Sea grain trade, economic sanctions, geopolitical uncertainty and rising inflation in some countries, bring into question how realistic the establishment of a BRICS Grain Exchange is.

The establishment of the BRICS Grain Exchange would also be at odds with some BRICS countries’ measures to impose more control over their domestic grain supplies and prices. Brazil, China, India and Russia are actively doing this, and not all the applied measures are compatible and coordinated on the BRICS level yet. For instance, the Chinese market is still partly closed for Russian wheat and other grains from various destinations. India imposes from time to time some sensitive restrictions on its rice and wheat markets. Russia still uses rather controversial export duties on wheat, corn and barley.

There’s also one more constraint to consider: the national regulation on commodity exchanges and derivatives market in BRICS countries that is not unified and synchronized. A lack of such law harmonization will make the implementation process more complicated and costly. There should be real efforts to develop a certain level of legal comfortability for the BRICS Grain Exchange model to make it viable and competitive. The exchange should not be an isolated club. It should be widely integrated, both into the national grain economies and the world grain market with a broad range of participants. Also, the competitiveness of the exchange will depend upon the grain to be traded there.

The founders of the BRICS Grain Exchange must consider how the organized marketplace is modernized and upgraded according to the world grain economy developments and innovations. The future of agricultural trade is expansion of services, digital solutions and “green” approaches, and it must be immanent and inclusive. The future exchange’s business model and strategies must be dynamic and nimble to stay up to date with the new grain trading tendencies. Otherwise, the BRICS countries and other world grain market players will ignore the newly established marketplace and be mostly focused on the advanced development of their national commodity exchanges.

In this regard, a cash/spot grain exchange cannot be considered as a competitive model in the 21st century business environment. Such an organized marketplace would be just an additional grain supply channel, not the place where grain prices could actively compete and be concentrated, and where real hedging is possible.

If the BRICS countries want to have a successful grain exchange under their umbrella, they need to start developing some innovative ideas and approaches in grain trade that can be effectively introduced to broader groups of grain market players and the investment community. This is an essential prerequisite.

It requires a broad discussion and involvement of various experts. Such an approach will enrich the decision-making process and help avoid some misunderstandings and obvious mistakes. Moreover, it could lead to a successful implementation, attracting various grain players and making a newly established grain marketplace competitive. Clannishness and secrecy will not help the process; it will only make it complicated and inefficient.

All efforts regarding the establishment of the BRICS Grain Exchange (if a decision is made) should be based on the in-depth feasibility study and distinctive business plan. The grain businesses must be aware of the main provisions of the project to help them decide whether to support it or not. Modern grain exchanges — those that function well in North America, Europe, Africa, Asia and Latin America — could be characterized as unique factories where grain prices (benchmarks) are produced and certain hedging services delivered. In other words, they provide price formation and hedging services that are in high demand in today’s grain industry. In the 21st century, they are all derivatives exchanges, and their success is based on a variety of liquid futures and options contracts actively traded there and strongly linked within the world and regional grain economics.

High liquidity cannot be achieved without the massive involvement of various grain market players (hedgers), risk takers (speculators), and prominent financial institutions. On the other hand, a potential investor would never come to the organized market/exchange that has no liquidity. These are just two sides of one coin, which are mutually dependent on each other.

Grain market participants in BRICS countries need transparent and effective price information and liquid hedging instruments for their price risk management. It is essential for their businesses, and this demand should be fulfilled one way or another.

The BRICS Grain Exchange project should be considered as 100% applied, one that will deal with the grain economy landscape in general, and grain trade and grain price formation system in particular. It should have certain economic and technical characteristics and presume some compulsory implementation steps based on the serious political support and active involvement of a critical number of grain market players and financial institutions.

Moreover, the complexity of this potential project is comprised of its international content and anticipated cross-border transactions that require certain political consensus under the BRICS umbrella on each step forward. It is not only related to the selection of the organized marketplace business model, place of incorporation, currency of trade, highly sensitive clearing and settlement solutions and cross-border operations, but also to the corporate management algorithm and decision-making process, technological policy and strategies, the reliable physical delivery procedure and its applied instruments, arbitrage and compliance, etc.

The initiators of the BRICS Grain Exchange proposal raised more questions than answers. They must provide detailed answers to those questions and provide a detailed roadmap to show how the concept can become reality. The economics of such a project should be a reasonable one, and its business solutions should be highly understandable and acceptable for potential market participants. Otherwise, it will remain nothing but hyperbole.

world-grain.com

Союз мукомолов Украины заявил о критической нехватке пшеницы и погоне за зерном