Consolidation has claimed most of the commodities exchanges that once dotted the Midwest. But a Minneapolis institution endures.
A product of long-gone days when flour milling was king, the Minneapolis Grain Exchange is on a roll these days.
A sea change in Canada’s grain marketing system is creating new opportunities for the Minneapolis exchange’s signature wheat futures contract. Volume in that contract is relatively strong. And a new apple juice futures contract could provide an additional boost.
The question is whether the exchange, a downtown landmark and the nation’s last independent agricultural futures market, will still be around in a few years to reap the benefits.
Commodity exchanges across the globe — those trading futures contracts on everything from Treasury bonds to oil to pork bellies — have been rapidly combining over the past decade.
“We’re a business and we’re willing to sit down and talk [with potential suitors],” Minneapolis Grain Exchange CEO Mark Bagan said.
But he said the focus remains on growing the business. “The bottom line is we’ve been around for 132 years and we’ve been able to survive.”
In the United States, the futures business is controlled by Chicago-based CME Group, owner of the Chicago Mercantile Exchange and Chicago Board of Trade, and Atlanta-based IntercontinentalExchange (ICE), owner of myriad global commodity exchanges. The latter is buying the New York Stock Exchange’s parent company for over $9 billion.
While CME and ICE have rolled up exchanges over the last decade, “it’s more than just consolidation,” said Ed Usset, a grain marketing specialist at the University of Minnesota. “The whole industry has gone private.”
Commodity exchanges historically were member-owned, nonprofit groups, Usset said. CME and ICE are huge, profitable businesses with multibillion-dollar market capitalizations. “And here is the Minneapolis Grain Exchange, fighting it all by itself,” Usset said.
Bagan, who became the exchange’s CEO in 2005, said he was hired “to change the corporate culture and run it as a for-profit.” The exchange officially became a for-profit institution in 2010, though its members do not receive dividends.
Bagan is a Minnesota native who started as an exchange trading floor clerk shortly after graduating from Mankato State University in 1988. It was a time “when people were still yelling and screaming in the [trading] pit,” he said.
The key to the exchange’s success is its long hold on trading in hard red spring wheat, particularly its signature futures contract, which sets a global wheat price benchmark. Hard red spring is a high-quality wheat used in breads and pastas and grown particularly in North Dakota, Montana, northwestern Minnesota and western Canada.
Through a futures exchange, farmers, grain handlers, millers and others hedge price risks. A miller might buy a futures contract when prices are low to lock in input costs; a farmer might sell a contract when prices are high to lock in profits. Professional traders speculate on both ends.
Bagan has an appreciation for the exchange’s history: One wall of his office is completely covered by old chalkboards once used to relay prices to pit traders. But Bagan also has presided over historic change at the exchange, and not just in its profit orientation.
Electronic trading, which cuts costs, debuted on the exchange in 2002 and expanded greatly under Bagan’s stewardship. The colorful pit traders, an institution themselves, became extinct in 2008.
The Minneapolis exchange “has done what it needs to do to be viable,” said Randy Martinson, co-owner of Progressive Ag Marketing, a Fargo, N.D., firm that does futures trading for farmers. “I certainly hope the exchange can remain independent. Not only does it have a lot of history for the state and for the region, it’s nice to see an independent voice out there.”