CME Group buys Kansas City exchange, heading off rival ICE

Reuters / CME Group is buying the Kansas City Board of Trade for $126 million in cash, cementing CME’s dominance in world grain futures markets and keeping rival IntercontinentalExchange from gaining an important foothold.

It is CME’s first exchange purchase in five years since it wrapped up a buying spree that put the Chicago Mercantile Exchange, the Chicago Board of Trade, and the energy-focused New York Mercantile Exchange all under its control.

The deal comes as the Chicago-based giant faces one of the biggest challenges yet to its benchmark wheat, soybean and corn contracts: ICE’s renewed efforts to build its agricultural markets business, including the launch this year of look-alike U.S. grain futures that opened a new front in the decade-long battle for commodity derivatives dominance.

So far, ICE’s copycat contracts have garnered little volume. But CME has responded swiftly to protect its lucrative grains franchise, a mainstay of global markets for decades, expanding trading hours to keep step with ICE in a move some floor traders have protested.

In Kansas City, a dozen or so traders, many clutching the electronic pads now used to execute most trades, gathered on the red and blue steps of Kansas City’s modest trading floor to watch a single lot of the exchange’s hard red winter wheat futures contract trade the old-fashioned way, with cries and hand gestures, rueing the likely closure of the pit next year.

And at the Minneapolis Grain Exchange (MGEX), which shut its futures floor four years ago, dealers speculated that it was only a matter of time before ICE made a bid for the last independently owned U.S. agricultural marketplace.

“The CME is taking an aggressive stance to firmly establish itself as the world leader in exchange-traded products, so this isn’t a surprise,” said Ken Smithmier, market analyst for The Hightower Report, a Chicago-based research and advisory firm.

Minneapolis next?

But one thing did surprise him: “I thought Minneapolis would be the first to be gobbled up.”

The deal will bolster volume in both CME’s and KCBT’s wheat contracts and provide new trading opportunities, said CME executive chairman Terrence Duffy. Kansas City’s wheat contract is for “hard red winter” wheat, a variety that is grown on twice as much U.S. farmland as Chicago’s “soft red winter” brand — but which has long lagged behind its more liquid rival in terms of volume.

News of the acquisition sparked speculation that the Minneapolis Grain Exchange could now be in line for a bid.

Some traders said a deal seemed inevitable.

“You would think that MGEX would look like a ripe target for some type of merger or acquisition, if nothing else because we are essentially a North American spring wheat contract, and the combined North American spring wheat is huge, even bigger than the U.S. hard red winter wheat crop,” said Austin Damiani, an analyst at Frontier Futures in Minneapolis, referring to combined U.S. and Canadian wheat production.

Asked about the possibility of a bid for MGEX, a CME spokesman said: “We remain focused on completing this transaction, as we believe it will create significant value for customers and shareholders of both companies.”

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