April 13, 2012

 

Intercontinental Exchange launches grain, oilseed contracts

Launching five look-alike wheat, corn and oilseed contracts, the IntercontinentalExchange (ICE) mounted the biggest challenge yet to arch-rival CME Group'scornerstone US grain futures business on Thursday (Apr 12).

 

Aiming to leverage its benchmark Canadian futures contracts to grab business from the Chicago-based CME, ICE said the electronically traded corn, wheat, soy, soymeal and soyoil contracts would start trading in May, pending regulatory approval. They will be cash-settled against the CBOT settlement price. CME said it was ready for the challenge.

 

"We believe competition is good for our business and will continue to work with customers to meet their needs for agricultural risk management," a spokeswoman said. She added that CME contracts "are local benchmarks that continue to offer the deepest and most liquid markets to customers around the world."

 

ICE, established in 2000 by a group of banks and energy companies, is taking on CME's Chicago Board of Trade (CBOT) contracts with a strategy it used six years ago in the oil market, when it launched a US oil contract based on the CME-owned New York Mercantile Exchange flagship West Texas Intermediate (WTI) contract.

 

ICE WTI has since gained a nearly one-quarter share of the US crude oil futures market, according to year-to-date data from the exchanges, although its growth has been largely aided by the ability to lower trading costs for dealers who are also trading ICE's benchmark European Brent contract.

 

Investment funds that trade grains without intending to take delivery or deliver the commodity could view the ICE contracts as an advantage, taking away trading volume from the CME Group Inc., owner of the CBOT grain futures markets.

 

Analysts were sceptical ICE would succeed in grabbing business from the well-established CBOT. A majority of farm users think of the CBOT as the headquarters for grains trading, said Dennis Gartman, publisher of the Gartman Letter.

 

"The odds of success are relatively minimal," he said. "Global grain elevators will comfortably stay with Chicago, unless ICE makes it much, much less expensive."

 

ICE is expanding in the grains markets as many farmers remain wary of the futures industry following the failure of brokerage MF Global last fall. Former MF Global clients, including many growers and grain elevators, are still missing an estimated US$1.6 billion that was held in accounts at the firm when it collapsed. Customer money is supposed to be protected, even if a brokerage fails under broker regulations.

 

CME has been under fire since MF Global's bankruptcy because it was the brokerage's regulators at the exchange level. ICE's plans "suggest they see an opportunity to make inroads in the business with some of the growing negative sentiment toward the CME," said Dale Durchholz, analyst for AgriVisor.

 

Still, ICE will have to convince market participants they will be better off if they abandon CME for another exchange. It will be difficult for the contracts to get off the ground because customers will want liquidity, said Terry Reilly, grains analyst for Citigroup.

 

"Without liquidity it will be hard for ICE to compete with the CME," Reilly said.

 

The ICE took on the New York Mercantile Exchange (NYMEX) in early 2006, before it was acquired by the CME, by launching a look-a-like WTI contract. NYMEX fought and lost a protracted legal battle with the ICE over the use of its crude oil futures price settlements in ICE swap contracts. In August of 2007, a US Appeals Court affirmed that ICE had the right to use those settlement prices to settle its swap contracts.