The CME Group has introduced its hard red spring wheat (HRSW) futures contracts, allowing market participants to trade all major varieties of North American wheat on a single exchange. This launch, which aims to provide more flexibility for wheat traders, comes in the wake of the long-standing Minneapolis Grain Exchange (MGEX) benchmark contract, which has been in existence since 1883.
Despite the potential benefits, the new CME contract has faced challenges in terms of trading volume. According to Bruce Burnett, a MarketsFarm analyst, establishing a successful spring wheat contract is a difficult task, requiring both expertise and luck to gain traction in the market. “It takes a lot of skill and luck to get a new contract off the ground that does significant volume,” Burnett stated.
The trading volumes for the CME’s HRSW contract have so far been “fairly disappointing,” and Burnett suggests that there may not have been a significant demand for a new contract. He emphasized that the coming months and years will reveal whether the two exchanges—CME and MGEX—can coexist or if one will ultimately dominate.
Burnett predicts that only one exchange will emerge as the leader in the long term. While MGEX boasts a 142-year legacy, CME benefits from the vast trade volumes generated by its other agricultural commodities. “That’s a very powerful commodity futures organization behind it,” Burnett remarked.
A key difference between the CME and MGEX contracts lies in their delivery specifications. The CME’s HRSW contract includes a falling number requirement for delivery, which is not a feature of the MGEX contract. This distinction may have implications for Canadian wheat farmers, many of whom participate in the MGEX contract through cash pricing programs or basis contracts.
Burnett noted that it will be crucial to observe whether commercial entities will gravitate toward the new CME contract or remain loyal to the established MGEX contract. The decision of which contract to use will ultimately influence the market’s direction.
The CME’s launch follows the introduction of milling wheat futures by ICE Futures Canada in 2012, after the Canadian Wheat Board’s marketing monopoly was dissolved. However, the ICE milling wheat contract has struggled with low trading volumes, and Burnett described its performance as “just horrendously low.”
According to CME, hard red spring wheat accounted for 75 percent of all Canadian wheat production and 26 percent of all U.S. wheat production in the most recent marketing year. The CME also highlighted that Kansas City wheat futures are based on hard red winter wheat, primarily used for all-purpose flour, while Chicago wheat futures are linked to soft red winter wheat, commonly used in pastries and baked goods.
As the new CME HRSW contract continues to grow, it remains to be seen how the market will evolve and whether CME can secure its place as a major player in wheat futures trading.
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