Sterling-based cocoa contract seen enduring euro denominated upstarts

* CME and ICE launching new contracts on March 30

* Euro contracts could reduce currency risk for some

By Nigel Hunt and Sarah McFarlane

LONDON, March 10 (Reuters) - ICE's sterling-denominated cocoa futures contract faces a challenge from two euro-based contenders this month, but the odds look stacked in favour of the established market.

Launching new commodity contracts has proved difficult in markets where they do not already exist, let alone in spaces where there are already firmly entrenched products, such as cocoa where futures and options have been traded since 1928.

CME Group (Kuala Lumpur: 7018.KL - news) and ICE are both launching euro denominated cocoa contracts on March 30.

Dealers said cocoa is too small a market to support two or three European contracts and historically it has been difficult for new commodity products to gain traction.

Examples include the CME's Black Sea wheat contract launched in 2012 and ICE's robusta coffee contract in 2007, which were virtually illiquid within weeks of launching.

"If they allow a proliferation of contracts then they'd better be prepared for a disorderly market, because if liquidity is not huge in one market, it's going to be even less spread across three markets," Derek Chambers, head of cocoa at Sucden said.

"I think it's absurd and the sooner two of the three in London die, the better."

ICE also operates a U.S.-based cocoa futures market which is not expected to be threatened by the new contracts.

Success will hinge on whether market participants are sufficiently disgruntled to take risk on a new product.

"Loads of people are upset but when it comes down to it they don't put their money where their mouth is," an analyst said.

AGAINST THE ODDS

A switch to a euro-denominated contract would reduce currency risks for the major cocoa processors who operate in euro zone countries. The currency of the world's top cocoa grower, Ivory Coast, is also pegged to the euro.

CME has also sought to capitalise on concerns that ICE's in-store contract does not always align closely with the physical market in Europe and dealers said its free on truck (FOT) basis should correlate more closely.

"There's no justification for the paper and cash markets to diverge so dramatically in a well-functioning futures market," said Peter Johnson, Jr., vice president at Transmar Group, a New (KOSDAQ: 160550.KQ - news) Jersey-based cocoa bean trader.

"The CME has succeeded in developing a well-considered contract that offers the best opportunity to rectify that problem."

Challengers must overcome the fact that a significant proportion of the 2015/16 cocoa crop, to be harvested from October, has already been hedged against the sterling contract.

"We've already probably got 30 to 40 percent of the crop hedged for the 2015/16 year now. In another three or four weeks more volume will be done," one trader said, making it difficult for the euro contracts in the early stages.

And a slow start could prove fatal.

"Very quickly the market will adopt one contract and place all its liquidity in that one," a trader said. (Additional reporting by Luc Cohen in New York, editing by David Evans)