MINNEAPOLIS, Minn. — The Minneapolis spring wheat contract could become the leader of North American wheat futures markets, some Minneapolis grain traders think.
But to crack that egg, the Minneapolis Grain Exchange wheat contract might need a Canadian delivery point, something difficult to achieve.
“It’s full of technical problems, but our hope is that they’re working it out,” said Scott O’Donnell of Frontier Futures, which operates out of the MGEX building.
“We, as traders, would double the size of our exchange, double the size of our volume, double … our customers.”
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The dominant wheat futures contract in North America is the Chicago Board of Trade soft red winter wheat contract. The next largest is the KC hard red winter wheat contract, which formerly traded at the Kansas City Board of Trade but is now owned by the CBOT.
Minneapolis spring wheat is the least-traded of the three liquid North American wheat contracts, but represents a continental crop that should have more weight, market participants generally believe. However, that crop is divided between the U.S. northern Plains and the Canadian Prairies and the contract only indirectly reflects the value of western Canadian wheat.
Futures contracts are designed to reflect the cash market by having “delivery points” that can have actual, physical wheat delivered to them to satisfy a futures position when a contract enters the liquidation process prior to expiry. That mechanism, if designed right, stops the cash and futures markets from diverging too widely.
Yet with half the crop grown in Canada but all the delivery points in the United States, Canadian cash values can’t easily discipline an errant futures market.
“In the end, you can’t really make delivery,” said O’Donnell.
“It’s 7/8ths of a complete system.”
MGEX delivery points are in the Minneapolis and Duluth areas, a long way to move Canadian grain to fulfill a futures position.
O’Donnell said that means many Canadian farmers and grain companies are probably not sure the contract is a reliable hedging device and might avoid it because of this uncertainty.
If the contract had a Canadian delivery location, that uncertainty would likely evaporate.
“If it’s the de facto hedge for the Canadian spring wheat farmer, that’s a good thing,” he said. “(That will only happen) if there aren’t any doubts. Right now there are many doubts. The Canadian merchandiser isn’t necessarily going to consider delivery a possibility.”
Establishing delivery points and mechanisms isn’t easy in any contract. Also, the international border creates challenges with different mandatory reporting requirements and rules.
But with Canadian-U.S. commercial trade in spring wheat developing in the post-CWB monopoly era, it would be good to see the MGEX contract develop with it.
“We’ve got this possibly huge contract here,” said O’Donnell.
“It’s a rebirth, in our minds.”
