Electronic grain trading may be bad news for growers.
Time and again I hear farmers complain about that "darn" Chicago Board of Trade (CBOT) and how "they" set our prices. But, in this new millennium, where e-commerce is growing rapidly, I wonder if "they" will still be setting our prices in the future? And will today's system someday soon seem like the good old days.
Before the Internet, the CBOT had virtually no threat from competition. Now flying onto the screen are start-ups like Rooster.com, E-Markets.com, Icecorp.com and Cybercrop. com to name a few. The business plans of these new companies are to build new pricing platforms, either cash trade or futures. The grain industry is building sites for business-to-business and business-to-consumer trading that could reduce the need for the CBOT.
Early this spring, Thomas Donovan, CBOT's president and CEO since 1982, stepped down. Some believe he could no longer hold the reigns of the "open outcry club" and succumbed to pressure from those pushing for electronic trading. Shortly after Donovan resigned, the CBOT announced plans to split into two divisions. One division will continue as the CBOT, unchanged. The other, more interesting, division is to be an electronic platform called eBOT.
Late in June, CBOT members voted overwhelmingly to make it a Delaware-based, for-profit corporation instead of a non-profit entity as it has been for the last 152 years.
When the CBOT lost its status as the world's largest trading center, its leaders decided to join forces with the new front-runners in Europe and offer CBOT products on an alliance platform. As a result, sometime during the third quarter, Project A (the electronic division of the CBOT) is supposed to merge into a new CBOT-Eurex alliance platform.
Keep in mind that "they" aren't messing with just "your" markets. Financial institutions are the driving force at the CBOT. Agricultural volume accounts for only about 15% of the total trade at the CBOT. Ag is just the ugly sister along for the ride.
It's simple to see that the CBOT is rapidly trying to keep pace with the electronic demands for trading from around the world. Internet access is going to be critical in the years ahead and just does not work well with open outcry. It's conceivable that in the near future we could have a tradable market that is open all the time.
Will expanded hours reduce volatility with more open time to trade? Does electronic access allow more small-lot traders to play, thus increasing liquidity? With the market always open, a local elevator could no longer post a bid nightly, just a basis bid that you could subtract from the current price traded.
As a producer, I wonder if this will be the beginning of the end for grain producers, much like formula pricing and contracting have done to the livestock industry.
As we enter into agreements with end users to reduce risk from the market, we also give up potential rewards from volatility. Those who desire change from the current pricing vehicle could end up taking what is offered at an Internet site.