CME’s new spring wheat contract hits bumps due to low volume

In a tightly contested battle in a small agricultural futures market, a spring wheat contract that has been trading for more than 140 years is facing competition from a rival contract launched this spring by CME Group, the world’s largest futures exchange.

Grown in the northern plains of the U.S. and Canada, spring wheat is used to make bagels and frozen dough. The contract was introduced in 1883 on the Minneapolis Grain Exchange and has long set the price for high-quality wheat used by North American millers and exported around the world.

Relative to other commodities, trading in spring wheat contracts is relatively small. Still, it’s one of the few major agricultural derivatives not controlled by CME Group, which has grown from the 19th-century Chicago Mercantile Exchange into a $99 billion behemoth in recent decades through acquisitions including the Chicago Mercantile Exchange and the Kansas City Board of Trade. It now trades nearly 2 million contracts a day on corn, soybeans, winter wheat, and cattle.

But CME’s much smaller rival, Miami International Holdings, or MIAX, which bought the independent Minneapolis exchange in 2020 and removed it from CME’s electronic trading platform this summer, is winning the battle in spring wheat.

“It’s David versus Goliath,” said Joe Nussmeier, a broker at Frontier Futures.

Earlier this summer, CME spring wheat futures saw impressive daily trading volumes of tens of thousands of contracts. Volume has dropped to a few dozen a day, according to CME data. Open interest, which measures the number of active contracts held by traders, has fallen sharply from a peak of nearly 2,100 contracts to about 600.

Large grain processors and millers, including CHS, Archer-Daniels-Midland and the Cargill Ardent Mills joint venture, which account for the bulk of commercial spring wheat trading, continue to stick to MIAX.

Traders noted that the surge in trading on the Chicago Mercantile Exchange (CME) was primarily driven by “market makers” — traders encouraged by the CME to trade contracts to increase market liquidity and make it easier for others to trade. However, these traders rarely take long-term positions, unlike commercial traders such as grain millers and elevators, who use futures to hedge the risk of holding large inventories of grain.

“There is no sense of commercial involvement, and for the product to thrive, you need a commercially supported hedger, whether it’s the end user or the elevator,” Nussmeier said.

CHS and ADM declined to comment. Ardent Mills did not immediately respond to requests for comment.

OUTDATED CONTRACT

MIAX shares jumped 38% on Thursday, the day of its initial public offering on the New York Stock Exchange, valuing the exchange operator at about $2.5 billion.

CME Group’s new spring wheat contract is nearly identical in structure, and both contracts traded electronically on the CME Globex trading platform until June 30, when MIAX debuted its Onyx trading platform.

Despite the increased competition, trading volume in MIAX Minneapolis wheat futures has remained steady this month at about 7,000 to 14,000 contracts per day, after falling 31% in July. Traders said the drop was largely due to technical issues related to the transition to the new trading platform. Open interest was about 60,000 to 70,000 contracts, close to historical levels.

Cash markets are also supporting MIAX, as spring wheat orders placed by grain elevators across the northern Great Plains remain largely tied to its contract rather than the CME.

“The legacy MIAX contract is still the preferred contract,” said Jeffrey McPike, an analyst at U.S. brokerage WASEDA Commodities.

In July, three CME employees traveled to Fargo, North Dakota, to pitch the new contract to a group of about 50 millers and traders gathered for the Wheat Quality Council’s annual spring wheat harvest tour.

CME branded products and a barbecued brisket dinner failed to boost trading volumes.

John Ricci, head of CME’s agricultural products desk, said the exchange would give the spring wheat contract “time to shape up.”

Tags: wheat