CHICAGO, July 1 It was business as usual on the first day of pit trading for Kansas City Board of Trade wheat on the floor of CME's Chicago Board of Trade on Monday, marking the start of a new era for U.S. wheat futures trading, traders and analysts said.
There was no fanfare, with no celebrities ringing an opening bell and no donuts or cake served in the hallways to mark the transfer of KCBT floor trading to the Chicago floor. The KCBT closed its pits for good on Friday following CME Group's purchase of KCBT last fall.
The new KCBT wheat futures pit was subdued, with only a handful of traders in the center straddling laptops, a stark reminder of the screen-trading revolution in grains that has depopulated floor-trading pits in the last two years.
Nearby, trading in KCBT wheat futures options was busier, since they - as with other CME grain options - are still traded mostly by hand-waving brokers and have not moved entirely to electronic matching.
An estimated 15,600 KCBT wheat futures traded, according to the CME website, compared with average daily volume of 29,600 KCBT wheat contracts in the final days of trading in Kansas City. CME preliminary options volume was not available, though floor traders said no KCBT spread and weekly options traded.
But KCBT veterans said it was a solid first day transition.
"I can't see any way that volume and liquidity wouldn't be enhanced by being here," said Jeff Voge, a former chairman of the Kansas City Board of Trade who watched the first-day trading in Chicago beside the new pit.
A GOOD DEAL?
On paper, CME's $126 million takeover of KCBT makes sense. Chicago's ability to draw in speculative money to grain derivatives should spill over to KCBT, boosting volumes and liquidity. CME has the leading voice for grain traders with regulators, farmers and agricultural bankers. CME is also debuting more KCBT options contracts with the switch to Chicago.
The wheat industry is closely watching the merger of KCBT and CME, not just for volumes and market liquidity, but also for cash pricing. The KCBT wheat contract is the benchmark for trading in hard red winter wheat, the main bread wheat.
HRW flour millers have been an influential commercial voice in shaping the KCBT contract for hedging and wheat pricing, and HRW exporters have also been a powerful voice.
Some wheat millers have expressed concern that the CME - whose contract is based on the much smaller soft red winter wheat crop - may tinker with the HRW contract to attract more speculative non-grain investors, as it has with the SRW wheat contract.
Asked about potential changes to the KCBT contract, Voge told Reuters: "That's a possibility," quickly adding that the merger will give the KCBT more exposure, volume and liquidity.
"People around the world, when they think of hedging wheat, they think of Chicago, right or wrong, even if you're a protein buyer," he said.
Unlike Chicago wheat, Kansas City grain traders also will still play a daily role in determining the value of cash wheat based on country location and protein values at every two-tenths of a percent change. The "basis" prices - called "protein scales" - posted by wheat millers and merchandisers will remain the bread-making industry's daily benchmark.
"For the foreseeable future we will still meet at 12:30 p.m. every day to publish the basis," said Morgan Shay, a veteran grain merchant who oversees the daily KCBT protein scales. "Mills and flour sales people rely on the numbers."
Another issue commercial grain firms will watch closely is the different way that KCBT and CME have coped with a lack of price "convergence" between cash and futures prices when futures contracts expire. CME uses a complicated system of "variable storage rates," while KCBT has taken a simpler path, setting up fixed seasonal storage fees.
"It was hard to see Kansas City pits close," said one KCBT trader now in Chicago. "But given that the underlying hard wheat crop is two to three times the size of the soft crop, I wouldn't be surprised to see Kansas City volume overtake Chicago wheat in time." (Reporting by Christine Stebbins; Editing by Dan Grebler)