Minneapolis Grain Exchange stands apart as enduring institution

By Mike Hughlett mike.hughlett@startribune.com

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."

Thomas Caldwell, chairman of Toronto-based Caldwell Financial Ltd., sees matters differently — a sale would likely be welcomed. But then Caldwell acknowledges he's a different constituent than the exchange's legions of farmers and grain traders.

Caldwell's firm invests in exchanges. In the 2000s, it bought memberships in three North American exchanges, including Minneapolis and Kansas City, another wheat specialist. The latter investment worked out OK. CME bought the Kansas City Board of Trade for $126 million last fall, and the K.C. board was to distribute excess cash from the sale to members. Before that, the board paid members a divi­dend, too.

But Caldwell said his investment in Minneapolis has "frankly been a disappointment." It's worth about 50 percent of what it cost, and the exchange here is not paying dividends, which would help "erase the pain of being underwater."

Caldwell's firm bought several seats on the Minneapolis exchange during the 2000s financial boom, when their value peaked at nearly $290,000 in early 2008. But then came the crash, hammering exchanges everywhere. Minneapolis seat prices bottomed at $75,000 in early 2009, and reached a post-crash high of only $135,000 earlier this month.

"There's lots of potential for Minneapolis," Caldwell said. "They have to do something to enhance it — build some dynamism — or have someone take them out, or frankly be marginalized."

Bagan argues that the exchange is building that dynamism. Last year, it launched a new futures contract for apple juice concentrate. It's not an easy move, since new contracts have a high failure rate.

And so far, Bagan acknowledged that trading in the apple juice contract has been lighter than he'd like. Still, he believes it has a good future, particularly because of how it was created. Typically, the exchange has been more "bombastic" in launching new products, simply assuming the market actually needed them.

Perhaps it's no surprise then that contracts for sunflowers, cottonseed and shrimp — to name a few over the years — didn't succeed at the Minneapolis exchange.

But with apple juice concentrate, the juice industry came to the exchange to help tailor a futures contract, Bagan said. "The industry basically said, 'We have no way to manage our price risk. … Help us devise a risk management tool.' "

The exchange also has a potentially big new frontier after the dissolution of the Canadian Wheat Board last summer. For decades, the Wheat Board purchased and marketed Canadian farmers' vast crops. Wheat growers did none of their own hedging.

The Canadian Wheat Board used the Minneapolis Grain Exchange's spring wheat contracts to help manage its own risk. But with the board gone, there's an opening to capture the futures business of Canadian producers and companies involved in the Canadian grain supply and export chain.

"It's a huge opportunity for the Minneapolis Grain Exchange," Bagan said.

The Grain Exchange began stepping up its marketing efforts in Canada early last year, Bagan said, months before the Wheat Board's monopoly ended. The exchange also tweaked its spring wheat contract to make it "North American," and more amenable to Canadian farmers.

Bagan believes the efforts already have begun paying off. So far this fiscal year, trading volume is up 10 percent in the spring wheat futures contract, which Bagan said is partly due to Canadian business.

The Minneapolis exchange is not alone in capitalizing on the Canadian Wheat Board's demise. ICE Futures Canada last year launched a wheat contract similar to the Minneapolis exchange's. But so far, not so good. Trading in the ICE contract has been thin, even nonexistent in recent months.

"The big thing is that the Canadian grain market already understands the Minneapolis Grain Exchange quite well," said Derek Brewin, an agribusiness professor at the University of Manitoba. "The international market knows how the Minneapolis exchange works, its delivery options, its quality — and they didn't want to risk things on ICE."

So, if ICE wants to be the player in hard red spring wheat, why not just use some of its ample resources to buy the Minneapolis Grain Exchange? "That might be a good idea," Brewin said.

Mike Hughlett • 612-673-7003