Hard red winter futures trading set to expand

The CBOT has acquired the Kansas City exchange and will move trading of the benchmark contract to Chicago

The Kansas City Board of Trade’s lightly traded hard red winter wheat futures contract is positioned to become the new benchmark for U.S. wheat prices following a takeover by CME Group, traders said.

The size of the U.S. hard red winter wheat crop is the best argument for why volumes for the futures contract that track the crop should rise, and eventually eclipse CME’s Chicago Board of Trade (CBOT) soft red winter wheat contract.

“Hard red winter wheat in the United States is the biggest crop,” said Jerry Gidel, chief feed grains analyst for Rice Dairy. “It should be the most represented and where the investors should be.”

U.S. farmers harvested 1.004 billion bushels of hard red winter wheat last year and the crop is typically 2-1/2 times the size of the soft red winter wheat crop, which is mostly grown in areas east of the Mississippi River and used as a key ingredient in cakes.

CBOT’s parent, CME Group, bought the Kansas City Board of Trade for US$126 million in cash in 2012. The exchange operator said it will close the storied KCBT trading pits in June, moving all trading of its hard red winter wheat futures to the electronic platform or the CBOT floor.

CME said it can make trading more efficient by locating the KCBT wheat futures and options pits next to the CBOT wheat pits, which will make hard red winter wheat trading easier than ever for Chicago customers.

But it will take time for hard red winter wheat to usurp soft red winter wheat’s position in the trading pits and on the screens, where most of the trades actually occur.

“The people who trade the fundamentals… need to be more comfortable with the contract,” said Glenn Hollander, a Chicago-based grain merchandiser and CBOT floor veteran. “I do not know if that is three years, three months, or 30 years.”

A catalyst such as a severe drought in the U.S. Plains, where much of the hard red winter wheat crop is produced, or a surge in demand for U.S. wheat exports due to global crop turmoil, could provide a quick influx of money and volume into hard red winter wheat futures.

Hard red winter wheat volumes have a long way to go to eclipse soft red winter wheat as the benchmark. During 2012, monthly volume for soft red winter wheat averaged 2.28 million contracts compared to just 441,850 contracts for hard red winter wheat.

Additionally, soft red winter wheat volume jumped 12.7 per cent in 2012 compared to 2011 while hard red winter wheat volume fell by 16.4 per cent.

Simpler fees

Soft red winter wheat’s established position as the leader will make it hard to be passed as traders are creatures of habit and reluctant to change practices.

But one trader on the CBOT floor said that the KCBT hard red winter is a better contract than CBOT soft red winter wheat, and that volumes for the hard red winter wheat will quickly pick up once CBOT traders get used to trading it.

The influx of speculative money into the soft red winter wheat contract in recent years has boosted volumes but also led to a lack of convergence between futures and cash prices. This has made it more difficult for commercial buyers to hedge their grain, which some veteran floor traders have said destroyed what the contract was designed to do.

CBOT has adopted a complex system of variable storage rates to try to address this problem with the soft red winter wheat contract but traders said the KCBT’s simpler set of seasonal storage fees is preferable.

CBOT’s takeover of hard red winter wheat trading will make it easier for its customers to build up spreads between hard red winter wheat and other contracts it lists such as corn, which traders said will help start the transition to more active trading of hard red winter wheat.

“Being able to have that… will definitely increase the volumes of hard red winter wheat and it will ultimately have the largest open interest,” Rice Dairy’s Gidel said. “It is going to be quicker and faster than people think.”

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