Smaller agricultural exchanges such as those in Winnipeg, Minneapolis and Kansas City may seem like little guys playing for chump change compared to the giants in Chicago, New York and London.
But these small, regional exchanges are vital to the interests of farmers in the centre of North America, said a longtime former director of the Minneapolis Grain Exchange.
And they need to remain local, regional and agricultural or farmers will lose a key financial tool of growing importance.
“To me it’s a really big deal,” said Bill Wilson, a North Dakota State University economist who sat on the MGEX board for 15 years.
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“As agriculture diversifies and develops more and more new products and commodities, there is increasing demand for trading type mechanisms,” he said.
“That will come only from the smaller, innovative exchanges who have to develop those as a way to survive. They’re not going to come from the big, big, big exchanges. It’s going to have to come from the smaller regional exchanges where agriculture is really important.”
Right now everything seems happy at the smaller exchanges, and indeed across the world of exchanges. Trading volume is booming and many exchanges, including Winnipeg, Minneapolis and Kansas City, are reporting large increases in business.
But the exchange world is also experiencing intense competition and turmoil as electronic trading and “demutualization” have broken some of the medieval-like restrictions on who can join the business and where they can do business.
Electronic trading allows new contracts to be cheaply and easily launched from anywhere in the world, breaking the regional monopoly that many exchanges have enjoyed.
And a radical restructuring of ownership at many exchanges has caused a flurry of takeover activity.
The NASDAQ exchange is expected to make an attempt to attain control of the London Stock Exchange, following its earlier attempt and previous attempts by a German exchange, a pan-European exchange and an Australian company.
None of this would be possible if the LSE had not broken its ownership restrictions a few years ago and opened itself to non-trading owners. As a publicly traded company, anyone can now buy a stake in the LSE, and with a few complications, anyone could buy control of the exchange with enough money and consent of shareholders.
The same could now happen, if the owners wished and securities regulations allowed, to the Winnipeg exchange, which demutualized earlier this decade, because it is a private company that can be bought and sold. The other small exchanges could also go the public or private route in the future, opening themselves to takeovers.
Wilson doesn’t have an opinion on whether a Winnipeg-style demutualization is good or bad, but he said he would hate to see the small exchanges disappear as part of an industry consolidation that sucked the small players into the centre of Chicago’s gravitational black hole of futures trading.
“There is no innovation at Chicago in terms of creating contracts that might have unique features or characteristics or serve the particular needs within agriculture,” Wilson said.
“Chicago has the tendency to create very large, generic contracts (that don’t help farmers that grow crops other than corn and soybeans).”
Exchanges such as the WCE, on the other hand, are the ones willing to spend time developing new futures contracts for micro-commodities,
Wilson said.
Recently the exchange announced it was developing futures contracts for Canadian Wheat Board grain that might become openly traded if the federal government breaks the board’s monopoly. As well, it struggled for years to make its flax contract work, even though it is a tiny commodity with microscopic production and commercial base compared to big commodities such as corn and soybeans.
As a result, Wilson said, farmers should hope that the small, regional exchanges like Winnipeg, Minneapolis and Kansas City stay local, regional and agricultural because no one from outside is likely to give much thought to small acreage crop.
“Where does the innovation come from?” he said. “In any industry the innovation comes from the smaller, entrepreneurial types of entities, where they’re finding niches where they can fill a void. The future of agriculture is not all about corn. The future of agriculture is all about the development of new crops and new enterprises. Is Chicago going to make a contract for any of these?”
