Grain Exchange Manages Price Risks

MINNEAPOLIS —  Pandemonium erupts in one corner of the cavernous room as voices hoarse from hours of shouting try to make a final deal. Arms wave in the air and fingers fly in the faces of others.

It’s two minutes before the hard red spring wheat futures market closes at the Minneapolis Grain Exchange and traders need to complete their deals before the final bell.

Tempers flare between traders standing chest to chest in the trading pit, and one sends another reeling backward with a shove before they work out their misunderstanding under the watchful eyes of exchange personnel.

It’s just another day at the Grain Exchange, where records have been toppling like dominoes as more people are getting involved in grain futures trading.

Hard red spring wheat futures contracts account for about 98% of the volume of business at the Minneapolis exchange, although futures contracts also are traded for white wheat, barley, white shrimp and black tiger shrimp.

Grain also is traded on the Chicago Board of Trade and the Kansas City Board of Trade, with each exchange offering contracts on different types of grain.

Minneapolis is the smallest of the three grain exchanges, but the city has the world’s largest cash grain exchange. One million bushels of wheat, barley, rye, sunflower seeds, corn and soybeans are bought and sold on an average day, based on small test samples delivered to the exchange.

The futures market is where the action is as farmers and food processors attempt to insure themselves against wide swings in grain prices caused by weather, supply and demand, and even wars halfway around the world.

In September, after Iraqi forces attacked Kurdish areas, “the futures market went down. There would be less demand for wheat,” said Ron Olson, who supervises trading for General Mills Inc.

A farmer uses futures contracts to reduce risk by agreeing on a sale price today for grain to be delivered at a future date. A food processor also uses the futures market to buy grain now at a set price for later delivery. Down the line, that stabilizes the price of bread on the grocery shelf.

“We think one reason the United States has the lowest grocery prices in the world is that we’ve had futures markets for the past 150 years to help people manage risk,” said James Lindau, president and chief executive officer of the Minneapolis Grain Exchange.

Speculators stand between the farmer and the food processor, taking the greater risk and hoping to make money as grain prices rise and fall.

Grain is delivered to fulfill only about 3% of the futures contracts, as most contracts are repurchased or resold before the delivery date. Most grain changes hands in the cash market.

“When I buy the real wheat, then I sell the futures,” Olson explained.

For the fiscal year that ended Aug. 31, nearly 4.9 billion bushels of spring wheat was traded on the futures market in Minneapolis, up 10% from fiscal 1995.

Spring wheat futures trading in fiscal 1996 included several milestones:

* Eight of the top 15 largest volume days were recorded, including contracts for a record 38,450,000 bushels on April 24.

* Eight of the top 15 largest volume months were recorded, including the second highest at 519,675,000 bushels in April.

* Prices were the highest in 22 years the week of April 22, peaking at $7.10 on April 26.

A big factor in the higher prices was a reduction in the size of the nation’s wheat crop because of poor growing weather.

Futures trading volume at the Minneapolis exchange has increased 350% in the past seven years, partly because of increased awareness of the importance of futures as a risk management tool, Lindau said.