Trading of Wheat - Minneapolis Grain Exchange
The Minneapolis Grain Exchange (MGE) in Minnesota is the central trading point for hard red spring wheat, as it is the only market that offers futures contracts specific to this class of wheat. Futures contracts provide one of the two variables that determine daily cash prices for hard red spring wheat and have been traded since the late 1800's. At the MGE, buyers and sellers trade openly and the prices discovered through the transactions are readily available to the public.
Futures contracts are used primarily for risk management, or price protection by both buyers and sellers, in anticipation of their purchase or sale needs for both nearby and deferred positions. Non-commercial interests also take positions in the market to speculate on price trends. The trends that develop in futures markets are largely driven by broader supply and demand factors for the crop as a whole. The MGE futures contract price represents hard red spring wheat that is of No. 2 grade or better with a minimum of 13.5% protein content. Although most futures transactions do not lead to a physical exchange of grain, they do represent a potential for the physical delivery or acceptance of wheat at Minneapolis. There are five months available for trading futures contracts: March, May, July, September or December.
Cash Markets & Basis
Cash markets are where buyers and sellers actually transact the physical exchange of hard red spring wheat and determine the value for more specific quality than afforded by the futures market. The cash value can vary greatly depending on location, transportation costs, time of the year and the specific quality factors involved in the physical transaction. This variance is represented by the "basis", which is simply the difference between the respective futures contract value and the resultant cash price at a given location. Variables that influence basis are the immediate supply and demand forces in a local market, the quality parameters in a contract, and delivery and handling costs.
Establishing Export Prices
Transportation costs are generally the largest component in the difference between cash values at various export locations, but quality factors such as grade, protein and falling number, and producer selling levels across the production region can also cause significant value changes. Exporters of U.S. hard red spring wheat take into account the futures price in Minneapolis and the basis levels offered by competing markets in establishing their cash price offer for a particular export location.
For example, a Gulf exporter receives a request from an importing country for a bid on August delivery of U.S. hard red spring wheat, Grade No. 2 or better, Dark Northern Spring, minimum 14 percent protein. The Minneapolis price for September is $110 per ton. The best alternative basis for the quality of wheat specified is $25 per ton over the futures price at Minneapolis. This equates to a cash price in Minneapolis of $135 per ton. Transportation to the Gulf from Minneapolis is $15 per ton and handling charges are $ 2 per ton. The exporter would offer the buyer a quote of $152 per ton or higher.
Prices that Northern Plains farmers receive for their wheat are also a function of the futures price and the export or domestic market which offers the best basis level for their local elevator and their quality of wheat. In this case, transportation and handling costs are deducted from the highest priced domestic or export market location to establish an elevators bid price to producers.
Markets can be quite volatile. Most buyers still use cash or "flat price" transactions to purchase their wheat needs, but more buyers are exploring multiple pricing methods with export companies to manage market volatility. In addition to spot or forward cash contracting, options available are: basis contracting, futures market hedges, and the purchase of options on the futures market.
Importer Market Training
Importers can attend a short course (approximately 10 days) at the Northern Crops Institute in Fargo, North Dakota, on how to manage and minimize price risk in the procurement of U.S. hard red spring and durum wheats. Sponsorships are sometimes available through U.S. Wheat Associates.