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The Minneapolis Grain Exchange: Past, Present and Future
Since 1881, the Minneapolis Grain Exchange (MGEX) has provided valuable price discovery and risk management services to producers and consumers involved in volatile commodities markets around the world.
The MGEX provides a platform for open outcry trading of futures and options. Contracts for hard red spring wheat,
Hard Winter Wheat Index (HWI), National Corn Index (NCI)
and National Soybean Index (NSI) comprise the Exchange’s risk management portfolio. In addition to futures and options, the MGEX hosts the world’s largest cash market for a variety of grains, trading
approximately one million bushels daily.
A Brief Account of a Lengthy History
Founded as the Minneapolis Chamber of Commerce in 1881, the Minneapolis Grain Exchange has served producers, processors and millers for 120 years.
The Minneapolis Chamber of Commerce opened as a regional cash marketplace to promote fair trade and to prevent trade abuses in wheat, oats and corn. Before the development of this centralized marketplace, farmers in the region had no way of knowing if they were receiving the best price for their grain. Processors and millers did not know if they were buying economically. Most farmers harvested and sold their crops at the same time, so the subsequent glut of grain into the market set the supply and demand curve askew. Supply was always high at harvest time, which meant farmers often had to sell their grain far below their breakeven price.
In 1883, just two years later, the Chamber of Commerce introduced its first futures contract: hard red spring wheat. This contract was launched to address price risk management needs of buyers and sellers of spring wheat and still trades today, as it has continuously since its launch. Throughout the years, many agriculture contracts have come and gone on the Exchange, which has always strived to meet industry demand for new products. As a smaller exchange, it is able to offer contacts for smaller markets, such as durum wheat,
a contract currently traded at MGEX. Consolidation in agriculture has led to the demise of several products, as the number of cash marketplace participants became too few to support a futures market.
For over 60 years, the Exchange operated as the Minneapolis Chamber of Commerce. However, by 1946, the term “Chamber of Commerce” had become associated with organizations devoted mainly to civic and social issues. So, in 1947, the Minneapolis Chamber of Commerce became the Minneapolis Grain Exchange, and the new Minneapolis Chamber of Commerce developed as the business and civic organization it is today.
A Current Picture
The futures pit is madness with method. It is controlled chaos. From
9:30 a.m. to 1:15 p.m. each day, the member-traders of the Exchange buy and sell futures and options through a type of auction called “open outcry.” As bids and offers are shouted or signaled through a series of hand signals and as trades are made, prices are reported to the entire trading world.
The MGEX creates a viable trading environment for large numbers of buyers and sellers in both the cash and futures marketplaces. The only authorized contract market for hard red spring wheat, the MGEX trades an average of 4,000 futures and options contracts daily. The cash market at the MGEX also provides a valuable service for market participants. An average of one million bushels of corn, wheat, barley, oats, rye, flax and soybeans change hands daily.
A Look To The Future
MGEX is committed to implementing changes to meet customer needs. As the futures industry continues to evolve, so does
February 2001, MGEX and Data Transmission Network (DTN), based in Omaha, Nebraska, announced a licensing agreement between the two parties that gives MGEX exclusive rights to DTN’s agricultural and weather databases. MGEX will use the data to develop indexes for cash-settlement of futures and options contracts.
On February 15, 2002, MGEX launched cash-settled corn and soybean contracts on the MGEX’s electronic trading platform.
In addition, MGEX launched financially settled hard
winter wheat futures and options on the electronic
trading platform on May 9, 2003. The DTN news release can be viewed in its entirety by
Structure of the MGEX
The Minneapolis Grain Exchange is a non-profit, membership organization. MGEX provides facilities for and oversight of trading that occurs on the Exchange, but does not participate in trading and does not establish prices. Memberships on the MGEX are bought and sold between individuals and firms. There are a fixed number of memberships, or seats, therefore the price fluctuates according to supply and demand.
The Department of Audits and Investigations (A&I) is the internal affairs division or policing arm of the Grain Exchange. This department investigates potential members and analyzes the financial statements of member organizations (to determine whether they will be able to meet their financial obligations). The A&I department oversees futures trading, investigates rule violations and communicates with the Commodity Futures Trading Commission (CFTC) to ensure that federal regulations are being met.
The Clearing House functions as a financial intermediary, or bank, between buyers and sellers. It is the buyer of every futures contract and the seller of every purchase. It keeps accounts for members, making sure that they have enough "margin" deposit money to cover their trades. By monitoring members' trades and accounts, the Clearing House guarantees that all futures trades will be honored with prompt payment or delivery.
The Sampling Department
collects grain samples from inspection agencies in the Midwest. These samples, which represent grain for sale on the cash market, are taken from rail cars and serve as a tangible idea of what buyers are purchasing. Samples are also used to settle any grain quality disputes. The sampling department compiles and posts the Daily Market Report that lists the number of rail cars for sale or application. It is also licensed by the State Department of Agriculture to use fumigants in rail cars.
Hedging versus Speculating
The futures market allows buyers and sellers to price commodities that, in some cases, have not even been produced yet. This is not as risky as it may seem. Futures contracts eliminate risk by enabling buyers and sellers to lock in a price today for a future delivery or settlement period. For example, a farmer can sell a futures contract guaranteeing a certain market price. If the price indeed goes down, he or she can purchase that futures contract for a profit and then sell that grain for the cash market price - the gain in futures offsets losses in the cash market price. Farmers can protect their investments by using futures and options. Futures contracts are simply insurance policies against price fluctuations. This practice is called hedging.
Hedgers leave guesswork and risk-taking to speculators. Speculators who invest in commodity futures are willing to accept the risk of adverse price fluctuations in exchange for the opportunity to profit from favorable price fluctuations. By assuming the risk that hedgers (those involved in buying and selling the underlying physical commodities) wish to avoid, investors keep the market from becoming stagnant.
After more than 100 years, the Minneapolis Grain Exchange still provides an auction site as well as many services for buyers and sellers of commodities produced in the Upper Midwest and Pacific Northwest and consumed around the world. The MGEX continues today as a time-honored, nationally respected institution. It has built a worldwide reputation for honesty and integrity, in part, through its commitment to excellence in self-regulation and outstanding services.