Ukrainian agrarians are interested in developing derivatives as instrument for hedging risks

Ukraine is one of the world’s top agricultural producers, but the average Ukrainian producer has no transparent exchange-based price discovery mechanism for its own produce and no way to manage risk using derivatives. However, there is great interest in such instruments. Over 40% of grain producers, about 75% of traders and 45% of processors say they would hedge risks by using derivatives if this market is launched in Ukraine. These are the findings of a nation-wide survey organized by the USAID Financial Sector Transformation Project and presented to financial and agricultural market participants today.

The survey covered 570 grain and oil producers, traders, and processors from most Ukrainian regions. In accordance with survey findings, critical risks for Ukrainian agrarians are grain price volatility and seasonality of harvest. International practices suggest that hedging is one of effective risk management tools. However, hedging in the Ukrainian market is impossible, as there is no trading in agricultural futures and options.

The survey demonstrates that systemic work is needed at the national level to develop derivatives as risk hedging instruments. This will include the launch of organized trading, post-trade infrastructure and the development of contract specifications.

“To achieve success in using derivatives, agrarians need a reliable financial infrastructure,” emphasizes Yulia Vitka, Deputy Chief of Party for the USAID Financial Sector Transformation Project. “We are working on creating it and hope that the passage of Bill #2284 will be a step not only toward legal certainty for derivatives trading, but toward building a post-trade infrastructure that will guarantee settlements. Agrarians, as much as their counterparties, must be confident that executed transactions will be settled timely and in full.”

Why the lack of an agricultural derivatives market in Ukraine?

“We have identified two main reasons forthe absence of a derivative market in Ukraine.First, no exchange exists with an adequate level of liquidity and a sufficient number of players.Second, low awareness by market particpants and their fear of risks,” stressed Volodymyr Kuziyo, Non-bank Financial Institutions Lead, USAID Financial Sector Transformation Project. “The launch of a commodity exchange and derivative contracts in Ukraine would allow agricultural market participants not only to manage the price risk, but increase their awareness of price trends as well.”

The survey suggests that 74% of grain producers and 80% of processors are interested in becoming more knowledgeable about hedging their own risks.

“Important prerequisites for liquidity in agricultural derivatives trading are a transparent exchange-based price discovery mechanism for agrarians’ produce and the attraction as many players to the market as possible. The development of such instruments as derivatives will have a huge impact on agricultural markets and the economy in general. But it is necessary to understand that a sophisticated legal and regulatory framework is needed to create an effective market,” pointed out Timur Khromayev, NSSMC Chairman.

Conclusions are based on the findings of the nation-wide survey about the prospects of using derivatives in the grain and oil crops market. The survey was conducted by Ukragroconsult in cooperation with the New Image Marketing Group in August-September 2019 and commissioned by the USAID Financial Sector Transformation Project.

Review the study  Prospects of using derivatives in the grain market of Ukraine