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Wheat trade makeover

Jeff Caldwell 02/12/2013 @ 2:40pm Agricultural content creator and marketer.

The trading of hard red winter wheat in the U.S. will undergo a major change this summer.

With the recent acquisition of the Kansas City Board of Trade (KCBT) by the CME Group last month, open-outcry trading of HRW wheat futures and options will move to the CME Group floor in Chicago this summer. It effectively takes another step toward more electronic trading of the grains, which CME Group officials say will "accelerate efficiencies and trading opportunities for customers trading both the HRW wheat and CBOT Soft Red Winter (SRW) wheat varieties," according to a CME Group report.

"Throughout the integration process, we've remained focused on our customers who manage global price risk associated with these two classes of wheat," says CME Group chief operating officer Bryan Durkin. "By moving Kansas City wheat to the Chicago floor later this year, we will make it as efficient as possible for our customers to trade both products and the spread between the two."

For some wheat farmers, the move from Kansas City -- on the eastern edge of the nation's Wheat Belt -- to Chicago may be troubling, according to Justin Gilpin, chief executive officer of Kansas Wheat. But, the move will have immediate benefits to those both producing and trading wheat.

"For a traditionalist, this change may be disappointing but the reality is it is an expected end of an era. As the location where the HRW wheat contract is traded moves further from the areas that grow it, I hope that future intentions of this contract do not also get further away from those who grow it," Gilpin says. "On the upside, being located in Chicago may increase trading liquidity and volume; time will tell."

Once the transition's complete, HRW wheat contracts will be traded alongside the Chicago Board of Trade (CBOT) soft red winter (SRW) wheat contracts and will remain on the CME Globex platform. In addition, CME Group will open an electronic trading floor through the end of September in the space currently occupied by the KCBT open-outcry trading floor in Kansas City, Missouri.

Despite all these changes, Gilpin says there's reason to be optimistic that the trading of wheat futures and options will remain fairly grounded to the wheat industry as opposed to being treated as an abstract commodity by traders from outside the industry. In other words, though the trade will likely see greater volume and liquidity, traditional market fundamentals will likely remain intact for at least the next few years.

The KCBT contract committee, for one, will stay in place for at least 3 more years. That's going to allow both wheat farmers and end-users to have oversight on how wheat's traded.

"This is the committee that has representatives from physical grain trade and has helped make rational decisions with users of the contract as well as farmers," Gilpin says. "This is an important component in the future direction of this contract and I hope that they will keep it in place and seek input from physical users of the contract and farmers."

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