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The Minneapolis Grain Exchange

The Minneapolis Grain Exchange
May 04
03:08 2011

The Minneapolis Grain Exchange (the MGEX) has existed since 1881 to help producers and end users of a specific class of wheat – hard red spring wheat (HRS) – manage their risks by setting market prices with derivative products. However, it is still actively pursuing other innovative ways to attract traders – both hedgers and speculators – to the agricultural derivatives market.

For instance, the MGEX now offers “agricultural index” contracts, which are financially settled contracts that track the average prices of various cash grains across the country. Basically, the cash grain bids from a sufficiently large sample of elevators and processors are gathered every day and averaged together to determine the average cash price for corn, soybeans, hard red spring wheat, hard red winter wheat, and soft red winter wheat. The difference between the futures price and the cash price of a given commodity is called “basis,” and trading basis is how most commercial grain companies operate. Speculators can also trade grain basis now by using both traditional grain futures contracts and the MGEX’s indexes. The MGEX is also intending to open a market for apple juice concentrate derivatives (futures and options).

Those products are in addition to the bread and butter of the MGEX’s business: the exchange of HRS futures and options. Hard red spring wheat is primarily grown in the Northern Plains of the U.S., which explains why this exchange historically developed along the Missouri River in Minnesota. It tends to be a higher protein class of wheat than the other types of wheat grown in the U.S., so it is milled into flour for different types of bread than hard red winter wheat (HRWW), for instance, or it can be blended with HRWW to increase a sample’s overall protein. As such, the HRS-specific contracts traded at the MGEX are sometimes used in spread trades against the Kansas City Board of Trade’s HRWW contracts or Chicago Board of Trade wheat contracts to arbitrage protein premiums, or simply reflect the different supply and demand situations of the different classes of wheat. The MGEX wheat contracts are also sometimes used to hedge cash trade in durum wheat, another class of wheat with high protein mostly grown in the Northern Plains. Durum wheat is used for pasta flour.

Because the MGEX’s HRS futures and options are important trades for not only commercial HRS producers and end users, but also speculators interested in the price differences between various classes of wheat, the contracts are traded during similar hours and with a similar holiday calendar to the CBOT. See http://www.mgex.com/mgex_dates.html for specifics. However, total open interest (the number of currently traded futures contracts) in MGEX wheat futures is less than 25% of the total open interest in Chicago Board of Trade wheat futures. There is another notable difference in the MGEX’s trading – it no longer takes place in an open outcry pit, or “the floor.” All MGEX contracts during the day and overnight sessions are traded electronically on the CME Globex platform.

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