ECONOMICS AND TRADE | Achieving growth through open markets
28 April 2008
Kansas City Board of Trade Provides Forum for Wheat Trading
Great Plains is the world’s largest wheat-producing area
Kansas City, Missouri -- It is 9:29 on a Monday morning in April in Kansas City. Several people wearing bright jackets mill about a circle –- the pit –- in the middle of a large room in an office building. Others stare at computers at stand-up stations positioned around the pit. It is a seemingly calm setting.
A minute later, at the ringing of a loud bell, the colorfully clad wheat traders begin to shout and gesture. One man in the pit gets most of the attention. He represents a company that has futures contracts for a large amount of wheat. The others vie to buy a portion of the contracts at a mutually considered fair price.
The setting is the floor of the Kansas City Board of Trade, the largest futures market in the world for hard red winter wheat, the type used to make most bread found in grocery stores, which represents 40 percent of America's wheat exports. Wheat buyers around the world look to prices settled at the Kansas City Board of Trade as the benchmark for bread-wheat prices. Bidding occurs by the traditional, seemingly uncontrolled, open outcry method and electronically.
More than 12 billion bushels of wheat change hands on the exchange in one year, according to the board.
A futures contract is an agreement between a buyer and a seller to deliver a product at a specific time in the future. Futures contracts ensure that grain is available to customers throughout the year, not just at harvest.
As trading ends at 1:15 p.m., the settled day's-end price is broadcast to market exchanges around the world. Subsequent trading on those other markets may change the price dramatically.
On this Monday, the opening price was 10.25 cents higher than the Kansas City Board of Trade's closing price the previous Friday. With wheat traded in lots of 5,000 bushels, a few cents' change represents a substantial amount of money, Sheila Summers, the board's vice president of marketing, told America.gov.
Farm commodity prices "are at their highest level ever," said Jay Sjerven, senior editor for the industry newsletter Milling and Baking News. Commodities, including corn (maize) and rice, also are part of food aid to the poor in developing countries, he said.
Sjerven said that prices in 2007 were "fairly high" because of drought in Australia, parts of Europe and other areas. Increasing demand, especially from growing populations and growing middle classes in Asia, are another factor in escalating prices, according to news reports.
Sjerven said global wheat stocks are at their lowest levels since 1978, with U.S. wheat stocks at their lowest level since 1948. More production in 2008 and beyond can lift the stocks needed for emergencies, analysts say.
Other wheat varieties grown in America are used for making cookies, crackers and chewy specialty breads. Planted and harvested at different months of the year depending on climate, these commodities are traded on exchanges in the Midwestern cities of Chicago and Minneapolis.
HISTORY OF THE FUTURES MARKET
Kansas City is situated on the banks of the Missouri River in the heart of one of the most productive wheat-growing regions of the world. In 1856 organizers of what was to become the Kansas City Board of Trade met to develop an organized method of buying and selling grain.
Early trading at the exchange was primarily in cash grains. Today, owners of grain elevators (large storage bins), exporters, millers, bakeries and producers use the exchange to protect their cash positions by buying or selling contracts. However, trading is the core business of many of the board's members. Prices are determined by supply and demand.
Many traders have college degrees in finance, economics and business. Others have no college degree but have worked their way up to become traders after taking clerical positions at trading companies. All must be confident and quick to act, Summers said.
Members decide how the exchange operates. Federal regulation of all commodity exchanges is by the U.S. Commodity Futures Trading Commission.
