'Cheap’ seats at Minneapolis Grain Exchange

If you thought the decline in housing prices was brutal, then you're probably not among the 399 owners of seats on the Minneapolis Grain Exchange.

The speculative frenzy that pushed seat prices on Minnesota's only remaining exchange to unbelievable heights this spring is wilting faster than unwatered corn. Memberships -- which give rights to trade on the exchange -- that sold for as much as $289,000 in February have fallen nearly 50 percent.

In the past 2 1/2 weeks the asking price for a seat has plummeted, from $220,000 to $150,000. And nobody's been willing to pay even that, according to the grain exchange's website. This week the highest bid for a seat was $122,000.

The steep drop in membership prices reflects worries among grain traders that the prolonged run-up in commodity prices has finally come to an end. Many of the economic factors responsible for the commodities price surge -- including high fuel prices, a falling dollar and poor weather -- have reversed themselves in recent weeks, prompting hedge funds and others that poured into the commodities markets since late 2007 to pull out.

Trading volumes have fallen, and so, too, has demand for seats on the venerable Minneapolis exchange -- the only market in the nation for trading hard red spring wheat.

Yet valuing seats on the exchange has always been an imperfect science, and one based on more than just the commodities markets alone. One major cause for last year's rise in membership values was speculation that the grain exchange would be acquired, giving members some hope that they might double or triple their money.

The speculation began in late 2006, after the Chicago Mercantile Exchange and the Chicago Board of Trade -- longtime fierce competitors -- agreed to an $11 billion merger. That same year, Atlanta-based IntercontinentalExchange, also known as ICE, announced that it would buy the New York Board of Trade for $1.05 billion.

There is still considerable buzz in trading circles that the grain exchange may consider selling -- a buzz fueled, in part, by the outside investment companies that have bought multiple memberships on the exchange. As one trader noted, the price of a membership is still more than seven times more than it was just three years ago.

"Generally speaking, those who own memberships on the grain exchange are not dumb people," said Charles Soule, floor manager for Country Hedging Inc., the commodity brokerage subsidiary of CHS Inc. of Inver Grove Heights. "Most of them are pretty shrewd. They've seen what's happened with other exchanges [that were acquired], and in the back of their minds they may be optimistic that it will happen here, too."

The value of a seat is based on other factors, too, including the real estate that the exchange owns downtown. The exchange's three-building complex is currently valued at about $14 million, according to Hennepin County tax records -- that's $35,000 per seat.

For now, the declining value in the memberships doesn't appear to have dampened spirits on the floor of the exchange building at S. 4th Street in Minneapolis. On Friday, just seconds before the closing bell, traders -- many of whom lease space from members --stood shoulder-to-shoulder in the pit, throwing up their arms and hollering at people just inches away. Through July, more than 857,599 futures and options contracts have been traded on the Grain Exchange, down 9 percent, from 937,705 over the same period a year earlier. About 46 percent of the contracts are traded electronically, rather than on the floor of the exchange.

Alan Kluis, president of Wayzata-based Northland Commodities, said he expects the commodity markets to heat up again in the coming weeks. Prices for corn have dropped low enough that large hog operations and ethanol producers, which curbed purchases this spring, will start buying. And the large hedge funds that have pulled their money out of the market may become active again, driving up volumes, he said.

"The hedge funds can cause a lot of short-time price volatility," Kluis said. "When they're all hitting the 'buy' button at the same time, prices can go a lot higher than you think."

It's going to take more than a few months of falling commodities prices to persuade Martin Farrell to unload his membership in the Grain Exchange.

The independent trader bought a seat in the mid-1980s for just $10,000, and it's now worth more than 10 times that amount.

"I think everyone knew this [price decline] was coming," he said. "You gotta keep in mind, we're used to volatility."

Chris Serres • 612-673-4308