When someone brings up the wheat futures market, Chicago is usually the first place that comes to mind. There’s nothing wrong with that, but it would be a mistake to forget other exchanges that offer wheat futures market contracts. Including Chicago, there are three cities in the United States that are home to exchanges offering wheat futures and cash markets. The other two are Minneapolis with the Minneapolis Grain Exchange (MGEX) and Kansas City with the Kansas City Board of Trade (KCBOT). All of these markets have opportunities in their own rights, but using the different contracts together opens a new world of potential trading strategies.
So why are their three different exchanges that offer a wheat futures market? Each exchange has a different type of wheat as the underlying commodity of the futures contract. The types of wheat are: soft red winter wheat (CBOT), hard red winter wheat (KCBOT), and hard red spring wheat (MGEX). Spring wheat and winter wheat are harvested at different times, which mean their new crop months, the futures contract month that switches from last year’s crop to the coming year’s crop, are different. July and September are the new crop months for winter and spring wheat respectively. Also, each type of wheat has a different protein content. Minneapolis wheat has the highest protein content followed by Kansas City and then Chicago wheat. The price ratios of each strand of wheat are based on the protein contents. Beyond the differences derived from the different wheat strand, Chicago wheat markets lead the way in volume, open interest, and liquidity, followed by Kansas City and then Minneapolis wheat.
Usually protein contents are left to be worried for by users of cash markets and commercial interests who take deliveries from the wheat futures market. The discrepancies in the wheat futures market open up some potential trading opportunities for those with the proper knowledge. Inter-market spreading is when you buy one market and sell another market simultaneously. An example would be a long Chicago March wheat and short March Minneapolis wheat trade. Inter-market spreading of wheat futures is a niche market that’s most often conducted by a small group of investors, when compared to general speculative positions, including floor traders and investment funds. The differences in acres planted, yields, new crop contract months, and protein contents can often be turned into inter market spreading opportunities and even sometimes lead to arbitrage opportunities.
As I mentioned, the CBOT, now a division of the Chicago Mercantile Group Inc., is the most noted wheat futures market. When you here a price reference to the “wheat market” it’s probably referring to Chicago’s soft red winter wheat futures market. The other wheat markets are essential to their industries, but the innovation of the CBOT’s futures markets and products has been essential to the KCBOT and MGEX evolving into their current forms. All three of these exchanges are used for business by speculators, hedgers and commercial interests.
Trading in futures and options involves a substantial degree of a risk of loss and is not suitable for all investors. Past performance is not indicative of future results.
