Hot Commodity

Historically, each crop exchange has focused on one of the three main types of wheat. The Minneapolis Grain Exchange offers hard red spring, the Kansas City Board of Trade deals in hard red winter, and the Chicago Board of Trade trades soft red winter. Other exchanges have contemplated offering a hard red spring wheat contract, but “our customers have indicated that they support the [Minneapolis] exchange and intend to maintain that support,” Bagan says. Market liquidity would be difficult to achieve for another exchange that chose to offer a similar contract for hard red spring. Ultimately, Bagan says, no one has come forward to offer a competitive contract.

Bagan and Nancy Krull, the exchange’s marketing manager, have reshaped their sales effort to keep that support from customers—reaching out directly to the people most likely to use the exchange, and partnering with existing commodities brokers and clearing firms to make those contacts. “We’ve focused much more on our key audiences—the people who could benefit from the exchange,” Krull says. She and others from the exchange have literally gone out into the field, speaking to farmers as they stand beside idling tractors, and visiting operators of grain elevators, ethanol plants, and other businesses that may need to protect themselves against rising or falling prices by buying or selling futures contracts. For instance, “everyone involved in wheat production and processing has a need for risk management,” Bagan says, “which is what the Grain Exchange provides.”

Farmers, millers, flour buyers, elevator operators, and other such players interact with the traders on the Minneapolis Grain Exchange because they have a need to hedge their business exposure to a market. The exchange markets to these people because they don’t always realize that they can buy and sell futures—which amounts, in effect, to buying insurance on the value of their crop. By hedging their position though the sale or purchase of futures or options contracts, they can protect themselves against price fluctuations.

For example, a farmer might be worried about prices falling between the time he plants his crop and the time he expects to harvest and sell his crop. What he will do then is to sell a futures contract to a trader in advance of the harvest. This enables him to get a higher price for his crop in the event that prices do go down—which, Krull says, they historically have done. If they do fall, he can buy back the contract at a lower price, pocket the difference, then sell his crop in the cash market. The buyer of the contract has to pay the farmer, which offsets the losses the farmer incurs when he goes to sell his crop in the fall. (The contract’s buyer is betting that the crop’s price will go up, which they’ve been doing lately.)

The Hot Seat

More people appear to have recognized the potential benefits of trading futures contracts. Hence the higher trading volume, increased seat prices, and increased open interest at the Grain Exchange. Because of this activity, the exchange has been profitable for the past two years and expects to be so in 2006 as well.

As an operating company, the Minneapolis Grain Exchange is technically owned by its approximately 400 seat holders—399 to be exact, although the number of seats has in recent years ranged from as many as 420 down to 390. The exchange may authorize as many as 600 seats, but Bagan says there are currently no plans to issue more seats.

Besides the strength of the commodities market, the Grain Exchange’s increasing seat values may also be tied to a less obvious factor: real estate. The exchange, Bagan explains, actually has two lines of business: trading and property management. Its corporate entity owns its three buildings in downtown Minneapolis, on the block bounded by South Third and Fourth Streets, and by South Fourth and Fifth Avenues. This property comprises 306,000 square feet of office and some retail space. A year ago, the exchange’s office and retail space had a 33 percent vacancy rate. Thanks to nearby gentrification and an improved commercial real estate market, that vacancy rate now has shrunk to just under 20 percent.