The long history of American grain markets is defined by several landmark events. One of the first was the establishment of the Chicago Board of Trade in 1848. Another is the launch of wheat futures on the Kansas City Board of Trade (KCBT) in 1856. Today, as the KCBT trading floor officially moves to the CBOT trading floor in Chicago, we’re seeing another.
Hard Red Winter Wheat (HRW), the contract traded at KCBT, is the first futures product to be added to the CBOT trading floor since 2005, and joins Soft Red Winter Wheat (SRW), the contract traded in Chicago for more than 135 years. But this is about more than the venue where these products trade.
HRW and SRW are complementary products. SRW has long been the liquidity leader, with more than 110,000 SRW futures and options traded daily in the first quarter of this year, while HRW – the wheat used in making bread – is the most exported grade of wheat in the U.S., accounting for about 36 percent of exports in 2012.
The combination of HRW products with SRW futures and options will provide new trading opportunities for grains market participants on the trading floor and on the screen. It will also enable them to execute spread trades in a more cost-effective way to manage risk associated with the price differentials inherent between these two classes of wheat.
Options on those spreads, and options on Hard Red Winter Wheat and the Minneapolis Grain Exchange’s Hard Red Spring Wheat are available starting today.
Also beginning trading today are weekly options in the HRW contract, which are aimed at managing event risk like weather and USDA reports during the crop year. Similar products, like Short-Dated New Crop Options, are already available for SRW. This new breed of options gives market participants the opportunity to hedge with a lower cost than the traditional options contracts but for a shorter period of time. It also provides an avenue for growth of the Kansas City product line which, to date, has a nascent options product suite.
Throughout the transition of Kansas City products to Chicago, our primary commitment is to the end users and physical grain customers who rely on our wheat products to manage risk. By bringing together 300 years of combined experience, we’re providing them with a new tool kit to do that.