Published October 18, 2012
CHICAGO – More than 130 years after it joined exchanges in Chicago and Kansas City as a marketplace for U.S. farmers to hedge their crops, the Minneapolis Grain Exchange now has a lonely distinction: the last best chance for acquisitive rival Intercontinental Exchange to get a foothold in the market.
In the wake of Wednesday's deal for Chicago rival CME Group to buy the Kansas City Board of Trade, the so-called MGEX is now the last independently owned agricultural exchange in the United States, home to a niche spring wheat contract as well as more esoteric products including agricultural index contracts and apple juice futures.
Although trading volume in MGEX wheat is only a third as much as Kansas City's wheat contract and equivalent to just 5 percent of the benchmark Chicago Board of Trade contract, it may prove to be a better fit for ICE.
First, both exchanges are wholly committed to electronic trade: ICE has made a habit of shutting open-outcry trading floors after buying other exchanges in New York and London, while MGEX closed its open-outcry futures pit in 2008.
And both have maneuvered to tap into business from Canada, where the grains market is opening up for the first time since 1943. MGEX last year allowed Canadian wheat to be delivered against its contract, while ICE bought the Winnipeg futures market in 2007 and launched a suite of little-traded grain futures at the start of this year.
Having missed out this summer on buying the London Metals Exchange and now pipped in Kansas City, MGEX is ICE's last chance to challenge the CME in U.S. agricultural markets, expanding beyond energy and soft commodities, traders say.
"The speculation would be that ICE would be interested in Minneapolis, to get a foothold into the U.S. agricultural trade. That is the talk," said Austin Damiani, an analyst with Frontier Futures in Minneapolis.
MGEX President and CEO Mark Bagan would not comment on whether the exchange was involved in any merger talks.
"We will evaluate all opportunities to observe what is best for our market participants and our members," he said.
An ICE spokesperson also declined to comment on whether it was interested in bidding for or buying MGEX or whether it had bid for Kansas City. KCBT officials said they had multiple bidders, but did not name them.
CME's purchase of the KCBT comes five years after it beat rival ICE in a bidding war for the Chicago Board of Trade and came as little shock to most dealers. The surprise, instead, was that Kansas City fell first.
"I thought Minneapolis would be the first to be gobbled up," said Ken Smithmier, market analyst for The Hightower Report, a Chicago-based research and advisory firm.
But Thomas Caldwell, CEO of Toronto-based Caldwell Asset Management, whose firm owns 13 seats at the KCBT and 37 more at MGEX, dismissed as wishful thinking any market talk that Minneapolis would be next.
"It seems to us that management doesn't really care too much about the non-trading owners of the exchange," he said, noting that KCBT had paid dividends to shareholders for years, while Minneapolis has resisted such payouts. Calling Minneapolis Grain Exchange's management "myopic," he added, "we're pretty annoyed at the bunch."
MGEX LOOKS TO CANADA
Housed in a landmark downtown building, MGEX launched its signature contract in 1883 to trade the region's hard red spring wheat, a high-protein variety used to make bread and frozen dough products that today accounts for about a quarter of all U.S. wheat production.
Perhaps the exchange's greatest fame came in early 2008 as spring wheat futures skyrocketed to $25 a bushel, the highest-ever price for any U.S. wheat contract, amid historically tight U.S. and world supplies of high-protein wheat.
MGEX staff have spent the last few years working to raise the exchange's profile in Canada, the world's top exporter of spring wheat. Anticipating the dismantling of the Canadian Wheat Board's marketing monopoly in August this year, MGEX announced in 2011 that it would allow non-U.S. wheat to be delivered against its futures contract.
"With the Canadian Wheat Board going out of business, the Canadians are looking to hedge their wheat totally with us," said one member of the MGEX board of directors, who declined to say whether MGEX had been approached for a takeover, and declined to be named due to lack of authorization to speak on behalf of the exchange on the issue.
"We see a marriage of us with Canada to trade a truly North American wheat contract. The size does not bother us. We have an efficient operation," the board member said.
Bagan and MGEX traders said the Canadian Wheat Board had been a major hedger on the MGEX.
Open interest in MGEX spring wheat totaled 43,766 contracts as of Tuesday, up from less than 31,000 in July but down from an all-time high of 73,279 in November 2010.
Open interest in CBOT wheat totaled 462,288 contracts by Tuesday, with KCBT wheat listed at 158,180 contracts.
In a bid to gain a share of the lucrative U.S. grain market, ICE challenged the CME by launching look-alike corn, wheat and soybean contracts earlier this year, offering exclusively electronic trading nearly 24 hours a day. But trading activity has been anemic at best. Open interest in ICE U.S. wheat futures as of Tuesday totaled 694 contracts.
ELECTRICITY, SHRIMP AND APPLE JUICE
Along with spring wheat, MGEX has experimented over the years with a host of other contracts, from electricity to shrimp. Most recently, MGEX began trading apple juice concentrate futures in August.
MGEX wheat futures trade on the CME Group's Globex platform, along with KCBT and CME's Chicago Board of Trade wheat. But unlike wheat futures in Kansas City or Chicago, MGEX spring wheat futures have been traded all-electronically since late 2008. MGEX options are traded electronically as well as by open outcry.
However, the volume of trade in Minneapolis has long trailed that of the KCBT and the CME Group.
A former outside member of the KCBT board of directors who declined to be named said that CME's purchase of the KCBT meant it would only be "a matter of time before the Minneapolis is brought in."
Traders said MGEX membership prices remained well below their 2008 peak of $289,000, with the latest membership bid posted Wednesday at $85,000. Seats have not traded above $100,000 since March.
Based on the last traded price, with a total of 402 memberships, the exchange would have a value of $34.2 million, excluding other assets such as the MGEX building.
(Additional reporting by K.T. Arasu, Sam Nelson and Ann Saphir in Chicago; Editing by Phil Berlowitz)