January 31, 2008

 

Potential merger of US energy and grain exchanges "a marriage made in heaven"

Highlights

Merger may generate greater interest in ethanol contracts   Anti-trust concerns unlikely    More liquidity and opportunities in both markets   Transaction costs likely to be lowered

 

 

A potential linkup of the CME Group Inc. (CME), which owns the CBOT and Nymex Holdings Inc. (NMX) which owns the New York Mercantile Exchange would bring together the grain and energy markets, creating the possibility for greater liquidity and access to a larger trading audience, for the biofuels sector analysts said.

 

Uniting the grain and energy markets could also create new trading opportunities, the potential for lower transaction costs and less competition, they said.

 

Nymex Holdings, parent company of the New York Mercantile Exchange, offers primarily metals and energy contracts.

 

CME Group Inc. and Nymex Holdings Inc. confirmed Monday that they are in preliminary talks that may lead to an US$11 billion acquisition of Nymex by the CME. The parties agreed to a 30-day exclusive negotiating period.

 

The CME Group, which was formed last year when the Chicago Mercantile Exchange bought the Chicago Board of Trade, is home to a wide array of products, including grains.

 

The two exchanges already have a connection. The CME's Globex electronic platform hosts screen trading of Nymex products.

 

Phil Flynn, an energy analyst at Alaron Trading in Chicago, said the acquisition of Nymex by the CME would be a marriage made in heaven for energy and grain, because the US government's commitment to alternative fuels increases the need for a viable market for the biofuels industry to hedge risks.

 

"The acquisition of Nymex, already trading on CME's Globex electronic platform, offers up opportunities to enhance both markets, particularly with the new hot market alternative fuels such as biofuel," he said. Having grains and soyoil mixed in with energy provides for great spread opportunities, Flynn added.

 

"Placing energies and grains in one trading arena would create a smooth transition for hedgers trying to execute crack spreads where you buy corn, buy natural gas and sell ethanol," Don Roose, president of U.S. Commodities in West Des Moines, Iowa, said

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In the US, biodiesel is primarily made from soyoil and ethanol is mainly produced from corn.

 

"The merger, with increased opportunities for spreading between energy and grains can only make things simpler for those of us out in the industry that are executing hedging strategies," said Roose.

 

Rick Kment, a biofuels analyst at DTN in Omaha, Neb., also said a merger would improve hedging opportunities.

 

He said that with the two markets on separate platforms despite each trading electronically on Globex, currently it is difficult to hedge between the grains and energy based on transaction costs, and therefore a merger would provide for more access.

 

If the exchanges joined, it would also help to increase additional crossover buying in general as well as in the biofuels market, Kment added.

 

Flynn at Alaron Trading said that a merger also would open up the possibility for a new ethanol contract, so instead of two contracts - Nymex's sugar-based ethanol contract and CBOT's corn-based ethanol contract, which have attracted little interest - the market could have one that works and encourages more volume.

 

The Nymex ethanol contract is an over-the-counter product that clears through Nymex. Nymex is scheduled to launch an ethanol futures contract in the first half of 2008.

 

CBOT ethanol futures currently are lightly traded, with open interest of 2,399 contracts. In comparison, open interest in CBOT corn futures stood at 1,424,694 contracts as of Monday's close. Open interest is the number of open positions in the market.

 

Said Flynn at Alaron Trading: "The bottom line is we need a strong U.S. presence in these markets and the mixture of energies and grains markets creates a lot of opportunities for hedgers and end-users alike as well as a win-win situation for consumers to get better price discovery and liquidity."

 

The only concerns about a possible CME/Nymex merger would come from the U.S. Justice Department, said Bill O'Neill, a principal at LOGIC Advisers.

 

However, on Monday several academics and lawyers who specialize in antitrust issues, said they expect officials at the Justice Department's antitrust division to conduct an investigation into the deal and conclude that it would not spark any antitrust concerns.