The US: CBOT Represents Canadian Spring Wheat
Reading time: 2 minutes
The Chicago Board of Trade (CBOT) has optimism that over the past twenty years, the annual volume of trade has been 7.5 times greater than in 2001. Due to its size, the Chicago stock exchange is internationally regarded as the most important indicator for anyone who wants to know something about the price of Wheat. The share price is not a reflection of ‘supply and demand.’
This is because ‘commodity traders’ do not trade in physical grain on the marketplace but in “grain futures”: the promise to deliver grain at a predetermined price. The lovely thing about the futures market is that the underlying product is standardized. It is not just a lump of grain: it is determined in advance exactly how much, what quality requirements it must meet when the contract ends, and the location where any physical delivery must take place.
The only thing that can still move is the price. The trade-in of this ‘promise grain’ is so great that it will take the US 135 years to grow it all. This is possible because contracts can also be settled financially with a payment. Twenty years ago, futures trading was still fifteen times the volume of physical production. While futures trading grew, the US Wheat crop shrank by a fifth.
The rapid growth of the futures trade has been made possible in part by technological developments. The CBOT (CME Group) has now been entirely digitized; there is no longer a trading floor, and commodity traders are scattered worldwide behind screens. CME CTR currently serves all 13 Canadian provinces and manages over 74% of new reported trades. According to AgFlow data, Canada shipped 2.7 million tons of Wheat in Q1 2023. The leading markets were Peru (0.3 million tons), Indonesia (0.24 million tons), Bangladesh (220,000 tons), and Colombia (160,400 tons).
Although much smaller than the Chicago Board of Trade, Matif in Paris has grown fast and tripled since 2010. Last year, as much Wheat was traded as the entire EU can produce in six years. The number of users of both exchanges has also increased, especially on the speculators’ side. They make money by gambling on the price development. Buy low, sell high. They try to buy the grain as cheaply as possible and sell it as dearly as possible. Thanks to the futures market, this can also be done in the reverse order: by first selling grain and only after a price fall, buying the grain. They call it short selling. Traders can thus benefit from any price development: up and down.
Case of US Wheat Trader
One of those speculators is David Durra, a descendant of a family of grain merchants. His father worked as a floor trader in the Chicago Board of Trade. He started in 2007, the year in which trade was entirely digitized. Durra invests with his own money. “This is what I do to put food on the table,” he says.
Durra calls herself a “fundamental trader.” He means he spends three hours daily researching supply and demand in the physical market. ‘I call farmers and traders, and based on that information, I predict where the price will go.’ The challenge is to predict the future slightly better and faster than others. Intellectually satisfying work, Durra believes. ‘I like the competition. This is the last meritocracy. If I made money, I had a better analysis than the rest. And something depends on it too.
In Chicago, financial investors now account for three-quarters of Wheat market transactions, where in 1998, it was still a third used to be. At the Matif, it is about half; at the beginning of 2020, it was still about a quarter.
Other sources: FTM
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