Expana eyes appetite for new breed of agricultural derivatives

Expana signed in October a landmark deal with broker StoneX to develop over-the-counter (OTC) dairy derivatives, reflecting an emerging appetite for new products that allow firms to hedge their exposure to specific agricultural sectors.

Chief executive of Expana Spencer Wicks said that, while the energy and metals are well-served by OTC and listed derivatives, the agricultural sector is lagging those markets despite its vast size.

Dairy alone is a $990bn (£754bn) market, Wicks said, underlining the importance of more specific derivatives to hedge different types of dairy products.

The Expana chief exec told FOW: “StoneX moved because they see that a lot of the food supply chain is unable to manage risk around things like fat-filled milk powder and whey protein concentrates which are the two products they are going to launch first as OTC derivatives before moving to the other dairy products we have listed under this first partnership.”

StoneX said last month it will start with OTC derivatives on fat-filled milk powder and high-protein whey while developing “plans to broaden coverage to additional dairy products over time”.

Liam Fenton, global head of Dairy & Food Group at StoneX, said last month: “Our clients in the global dairy sector are increasingly looking for new ways to manage risk and respond to market volatility. By working with Expana, we are giving them access to reliable, independent benchmarks that will help improve liquidity, support more transparent pricing and ultimately strengthen risk management across the industry.”

For Expana, the firm sees opportunities to launch agricultural derivatives into the OTC market before moving to the more standardised, listed space assuming there is client demand.

Wicks said: “I see the evolution of agricultural products not unlike iron ore and steel, base metals or oil, just that this is a more fragmented, more complex and larger market. I think it will follow the same steps which starts with an OTC market that eventually gives the exchanges confidence to pick the winners - the rest of the market infrastructure comes around that.”

Of course, there are agricultural futures and options available today. Chicago Board of Trade has corn and soybean futures, the Chicago Mercantile Exchange has milk, hog and cattle futures, Euronext has European wheat, and ICE Futures US and ICE Futures Europe have cocoa, coffee and sugar contracts, to name but a few.

Wicks said these products are fine as far as they go but food growers, processors and manufacturers are now looking for more specific hedging options.

“You can go to the exchanges for some products but there are so many food commodities - red meats, poultry and sea food - where there is little or nothing available on exchanges,” said Wicks.

This demand is also a function of the volatility that has characterised vast swathes of the commodity markets in recent years.

“If you think about the hedgers that want to lock in their price, these kinds of risk management products are becoming more and more interesting to them,” said the CEO. “In recent years, Covid, the Ukraine war and the Middle East have fanned the flames of volatility but there are currently few tools to manage this risk in the wider food and agri-commodity sector.”

Partnering with StoneX, the world’s largest non-bank futures commission merchant, is a good start but the price reporting agency is also looking at other opportunities: “Expana is the one-stop shop for agri products in the derivatives market,” said Wicks. “That will take its first steps with StoneX but it won’t surprise you to hear that we are also talking to exchanges about cleared derivatives. There are also other conversations about exchange-traded funds, indices and insurance.”