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Dec 3, 2012 ||
Today, the Chicago Board of Trade and Kansas City Board of Trade are officially part of the same organization. That these two institutions came together is a sign of how the exchange business has changed. But more significantly, it is a story about the global wheat trade.
CBOT has held the world’s benchmark wheat contract for more than a century – soft red winter wheat futures were launched in 1877. For nearly that entire span, KCBT offered its hard red winter wheat contract. The CBOT contract has long been the liquidity leader, and hence, the global benchmark. In 2011, the contract traded 24.2 million futures contracts. By comparison, Kansas City’s HRW contract traded 6.3 million futures contracts.
Among other things, the different trajectories of the two contracts – in terms of liquidity – is the result of different approaches to branding. CBOT spent more than a century carefully managing its reputation and building a realization in futures markets that Chicago is where the world comes to manage its agricultural price risk. Not just wheat, but corn, soybeans, live cattle and a host of other commodities.
But as anyone who produces, processes or distributes wheat knows, the wheat trade across the globe is not just about marketing. It’s also about usability. And that’s a case KCBT has rightly been making for years about its product. Hard red winter wheat is by far the most exported grade of wheat in the United States, accounting for about 40 percent of total U.S. exports in 2011. In fact, more than 14 million metric tons of HRW was exported in 2011 compared to just under two million metric tons of SRW. That’s because HRW is a grade with more nutritional value primarily used across the globe for making breads, while SRW is mostly used for baked goods like cakes and pastries.
Watch Tim Andriesen discuss what the acquisition of the Kansas City Board of Trade means for customers.
The combination of these two products – the benchmark hard and soft wheat contracts – provides new opportunities for those in the global wheat trade that did not exist before. While the CBOT and KCBT wheat contracts are very distinct products with different uses, the ability for producers and commercial participants to hedge their risk in both key benchmarks in one place will produce cross-margining benefits and other capital efficiencies. When you add in our new Black Sea Wheat contract, this makes CME Globex the platform for wheat traders.
Beginning today, CME and CBOT members and KCBT permit holders will immediately benefit from the ability to trade each other’s wheat futures and options products electronically in a more cost-effective manner. After the integration of clearing systems, participants in the global wheat market will no longer need to go to two different exchanges to hedge this risk. To some, putting up margin at two exchanges was a cost-prohibitive venture, even though both products were highly desirable on the global market.
With the addition of KCBT, CME Group strengthens its role as the key exchange for any participant in the supply chain to hedge their wheat risk, a role we’ve enjoyed for a long time. More importantly though, those same participants can now more efficiently trade several wheat products in liquid markets on one exchange.
With the increased ability to trade these contracts more efficiently, the global wheat trade is better off, and so are the businesses who participate in it.
Tim Andriesen is managing director of commodity products at CME Group.
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