Hot Commodity

Is that fact driving up seat prices? That’s difficult to determine, Bagan says. Seat holders on the Grain Exchange, first and foremost, are buying access to the trading floor. For the price of a seat, they receive trading floor privileges, reduced fees, and a stake in the future value of the exchange. Bagan says that while seat holders aren’t shy about expressing their opinions regarding the exchange’s real estate, voting procedures and other governance provisions appear to make it hard for them to demand the sale of the buildings.

But then why buy more than one seat, as Steven Greenberg has done? A seat on the Grain Exchange is an investment, Krull explains. Many people are purchasing more than one because they anticipate continued increases in membership prices. In addition, many companies want more than one person to be trading on the floor. (Greenberg can’t “take over” the Grain Exchange: Its rules limit ownership of an individual or group to 10 percent of all seats.)

The Index Advantage

The Minneapolis Grain Exchange’s five other contracts, which together constitute a much lower trading volume than hard red spring wheat futures do, are relatively new indexed products that are based on the average national price for corn, soybeans, hard red winter wheat, hard red spring wheat, and soft red winter wheat. These contracts also are exclusive to the Grain Exchange.

The appeal of index contracts comes from the fact that they remove from pricing something called the “cost of carry.” One of the problems with grain commodities futures is that their prices reflect the cost of transportation to and from the elevator and the cost of storage. An index is intended to provide a more accurate price to the farmer, one based solely on the value of the crop. In other words, the index contracts represent the average of what elevators are paying producers. So there’s a greater correlation to the cash market with that price than with the futures contracts. Another benefit of index contracts is that they are financially settled and traded all year. This gives the trader more flexibility than do futures contracts, which are settled in March, May, July, September, and December. In short, these contracts offer another way to manage risk.

The Grain Exchange’s index contracts are pitched specifically to risk managers, such as elevator operators and producers, as well as at financial buyers, such as hedge funds, commodity funds, and institutional investors looking to diversify a portfolio of financial assets with the “hard assets” that commodities represent.

Bagan believes that the global factors are in place for long-term growth, and that the exchange’s national corn, soybean, hard red winter wheat, hard red spring wheat, and soft red winter wheat indices will draw more and more traders. “We continue to look for new products, but we’re really excited about these new contracts,” he says. “We think we may have something here.”