Kansas City wheat futures and options are fitting in with many farmers’ hedging needs, right when Kansas City Board of Trade operations are getting yanked north to Chicago.
But prairie farm marketing advisers expect the move to a new home will make the former KCBT contracts work better than before.
“We’ve been using Kansas City a lot lately,” said AgriTrend Marketing president Derek Squair.
“We’re having to use Kansas more. We’re seeing a lot more of our producers grow CPS reds, winter wheats, general purpose wheats.”
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While most prairie farmers still grow quality, hard red spring wheat with high protein, more are either seeding different types of wheat because the end of the CWB monopoly offers new opportunities, or are growing the crop for high yield and forgetting about protein levels.
Three active wheat futures contracts provide direct wheat price risk hedging opportunities for farmers.
The Minneapolis Grain Exchange hard red spring wheat contract is the closest to the kind of wheat most prairie farmers have grown in recent decades, with a protein specification of 13.5 percent and a close relationship to prairie wheat prices, but it has the lowest liquidity of the three major contracts.
The Kansas City wheat futures contract uses 11 percent protein hard red winter wheat as its underlying specification. It’s a kind of wheat that can be used for bread or baked goods.
Chicago wheat futures are designed to represent soft red winter wheat, and no protein spec is listed. It is used in pastries, cake and cookies.
The Chicago Mercantile Exchange, which owns the Chicago Board of Trade, recently bought the KCBT and is transferring its contracts and operations to Chicago. The pit trade will be beside the CBOT wheat pit and the KCBT wheat contract will use the CME’s electronic trading platform.
Some hedgers are favouring Kansas City wheat futures because they are somewhat similar to Minneapolis wheat specs, but are more liquid. The more liquidity, the easier and cheaper it is for hedgers to use.
That’s an especially important factor for options users, since options are always less liquid, more finicky and complicated.
If a futures contract has weak liquidity, its options contracts are likely to be worse still.
That’s why Squair said he uses mostly Chicago wheat futures rather than Kansas City or Minneapolis options. Liquidity is king and even Kansas City options strike him as too expensive and lacking liquidity.
That’s Errol Anderson’s view too. The Calgary Pro Market adviser, who specializes in options, uses only the Chicago wheat contract for options, because it has the healthiest liquidity and getting in and out of a position affordably is essential.
But he also often uses Chicago corn options to hedge prairie wheat prices, since corn prices tend to lead the grain price complex and Chicago corn is super-liquid, which means low premiums.
With wheat options, it’s hard to go more than four months out because premiums get too high, he said.
Anderson and Squair said they hope Kansas City wheat options get more liquid now that the two wheat options communities of Kansas City and Chicago will be under the CME/CBOT umbrella.
More spread trading of futures will help the two contracts increase liquidity, they hope, and give the options a better base to build from.
Some traders and analysts have said they hope Kansas City can expand and become the dominant wheat futures contract because it is the biggest U.S. wheat crop in volume.
Also, it straddles the middle of the wheat quality spectrum and does a fairly good job of reflecting what is occurring with overall wheat complex prices.
