Hot Commodity

Wheat That Springeth Green

The Grain Exchange is one of six bricks-and-mortar crop exchanges in the United States. All trade contracts by “open outcry,” with brokers and dealers gathered around a trading pit, buying and selling contracts based on current prevailing market conditions. The best known exchanges are the Chicago Board Options Exchange (CBOE), the Chicago Board of Trade (CBOT), the Chicago Mercantile Exchange (the “Merc,” which in October announced plans to acquire the CBOT), and the Kansas City Board of Trade. Each exchange is set up differently. The Chicago Board of Trade, for instance, is a for-profit entity and publicly traded. The Kansas City Board is a for-profit but not traded publicly. The Minneapolis Grain Exchange is a not-for-profit entity. (One Canadian exchange, the Winnipeg Commodity Exchange, does all its trades electronically, with no trading pit.)

Since 1883, the Minneapolis Grain Exchange has focused on hard red spring wheat, which is planted in the spring and harvested in the fall. The wheat traded at other exchanges is winter wheat varieties, which are planted in the fall and harvested in early summer. Hard red spring is grown primarily in Minnesota, North Dakota, Montana, and Canada. Because it has the highest protein content of all varieties, it’s considered the premium kind of wheat.

Over the years, the Minneapolis Grain Exchange has attempted to diversify its business and revenue streams—in part to escape from the long shadows of behemoths such as the Merc and the other big Chicago exchanges. Some products, like durum wheat futures, seemed logical; others, like shrimp futures, were more mysterious (see chart, right). But the lack of trading volume in those contracts confirmed a reality that faces most commodity exchanges, Bagan says: “Nine out of ten contracts fail.”

But when you have only one that’s working, failures seem to hit home a little harder. The exchange had a persistent critical-mass problem: low volumes and relatively thin markets in most of its contracts, and depressed seat values. Now combine that with a very costly technology decision several years ago—when the Grain Exchange embraced electronic trading in a big way, then suffered through four consecutive years of losses (2001 through 2004)—and the result would put a strain on any organization.

“We tried to introduce two new concepts at the same time,” Bagan says of the exchange’s first electronic effort. “We attempted to move our contracts electronically, but did that with new contracts that hadn’t been proven yet. Because the new contracts did not trade at the volume level the exchange had anticipated, financially the business deal that had been set up became cost prohibitive . . . . We reassessed the program and chose a different technology vendor.”

The exchange relaunched after-hours electronic trading of its contracts in mid-December on the Chicago Board of Trade’s technology platform; Bagan says volume was as good or better than before. On August 1, the exchange launched electronic trading that’s simultaneous with floor trading, allowing its traders to interact with traders on other exchanges.

The Young Veteran

The exchange’s 18-member board of directors handed Bagan the president and CEO job in July 2005. Though just 41, Bagan is a 20-year veteran of the exchange who started in 1987 on a college internship then worked his way up from a job as a trading floor clerk. Before becoming CEO, he was the exchange’s corporate secretary and vice president of market administration, where he was responsible for supervising and then repairing the organization’s electronic trading operation. Bagan was also the exchange’s regulatory chief for 15 years.

Besides solving technology problems, Bagan and the Grain Exchange have experienced other improvements. For one, commodity prices are up. Most people know about skyrocketing gold, copper, and oil prices. But less-than-ideal growing conditions and increased demand have driven up crop prices. Higher prices and greater volatility have attracted more money into the crop exchanges—from commodities speculators, corporations, millers, elevator managers, ethanol plants, hedge funds, and institutional money managers.

The chief reason for this: Commodities prices tend to increase when financial markets anticipate higher levels of inflation. When inflation goes up, things that represent a store of value—land, timber, metals, oil and gas—increase in value. Financial assets decrease in value because they’re delineated in currency; when markets are faced with inflation, a dollar buys less.