ICE grain contracts kick off turf war with CME

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The IntercontinentalExchange (ICE) kicked off the most aggressive challenge yet to the CME Group's 160-year dominance of agricultural markets on Sunday with the launch of five grain and oilseed futures. In a bid to wrest a chunk of the multibillion-dollar grain business from the Chicago Mercantile Exchange, the Atlanta-based upstart ICE has offered lower margin requirements and nearly around-the-clock trading hours for corn, wheat, soybeans, soymeal and soyoil -- all based on the CME's own prices.

The first trade was in July corn, done at $5.82-1/2 per bushel, up 1-1/2 cents and came within the first 10 minutes.

By 1147 GMT on Monday, however, the contract had still only traded five lots, while July soybean future had a volume of seven lots. ICE July wheat futures had no activity.

European traders continued to focus on the CME's contracts on Monday, taking a wait-and-see approach to the new market.

"I have not had any interest from clients in the ICE contracts today, I think people are still holding off to see exactly how trading on ICE works," one German trader said. "There is a lot of background interest in how the new contracts will develop but the attraction of physical deliveries on the CME contracts remains strong."

In the ongoing contest between the two commodity exchange powerhouses, ICE can point to its benchmark sugar, cocoa and canola futures as evidence of its agricultural bona fides.

But it faces a tough sell in its bid to compete against the CME, which owns the Chicago Board of Trade and whose grain futures serve as the global price benchmark. Despite months of frustration and anger at the CME over its handling of the MF Global collapse, new member margins and changes to settlement procedures, loyalty to the Chicago market still runs deep.

"There is a lot of trepidation as far as farmer-type clients wanting to do business on that exchange, unless they see some sort of significant volume," Brian Hoops, president of Midwest Market Solutions, said of ICE.

The ICE launched its gambit a month ago, betting that hedge funds and big traders would be attracted to its offer of a 22-hour trading day, all-electronic dealing and lower costs.

But the CME has risen to the challenge, announcing plans to shift its own two-part, 17-hour trading day to a continuous 22-hour cycle from May 21 -- a change that has prompted another outcry from some traders and industry groups who are now calling on regulators to seek more feedback before it is implemented. European traders said the extended hours could be useful if there was a significant overnight grain tender but may make it easier for speculators to move the market as times when trade participation is limited.

"This is going to encourage speculation...since traders can't be there 24 hours a day," one French grain trader said.

The CME is now in a bind: Pressing ahead with the new hours, as it has said it will do, risks further alienating some of its core customers in the industry; but rolling back the change would leave the ICE as the only place to trade around major government reports, which are currently released while the CME is shut.

It remains to be seen whether that's enough to overcome the inertia that often afflicts new contracts, many of which fail. "Liquidity attracts liquidity. You have to have some way of attracting order flow to the new contract," said Craig Pirrong, a professor of finance at the University of Houston.

"But that's a difficult trick to accomplish. Usually it requires the incumbent exchange doing something stupid, and you can't count on CME Group doing that," Pirrong said.

Lynette Tan, investment analyst at Phillip Futures in Singapore, said that while there are obstacles to any new contact, growing volumes is possible, but it takes time.

"I think with all kinds of new contacts from exchanges, there is a year or two wait to gain trust, to wait for liquidity to come in, and I think there is no difference with this," Tan said.

AROUND-THE-CLOCK TRADE
The ICE wheat, corn and soybean contracts will share many contract specifications with CBOT, including a contract size of 5,000 bushels, a tick size of one-quarter cent per bushel and identical daily price limits. The contracts will be cash-settled to the settlement prices at the CBOT.

The ICE contracts will trade electronically on a 22-hour cycle from Monday to Friday, from 8 p.m. to 6 p.m. Eastern time (0000 to 2200 GMT). Trade will start two hours earlier, at 6 p.m. Eastern (2200 GMT), on Sundays.

ICE is also offering an implicit financial incentive for trading its contracts: lower margin costs. The initial margin to open a position in ICE corn futures will be $1,980 per contract versus $2,363 for old-crop CME corn; the initial margin for ICE wheat will be $1,870, almost 40 percent cheaper than for CME.

Even without entrenched competition, success is far from assured. ICE has failed to attract traders to three Canadian wheat and barley contracts it launched in January, ahead of the end of the Canadian Wheat Board's monopoly.

Open interest on Friday totaled only a few dozen contracts in ICE's milling wheat and durum contracts, and 232 contracts in its barley futures.

ENERGY UPSTART
Established in 2000 by a group of banks and energy companies who wanted an electronic market for power and gas, ICE has since grown into a major cross-asset exchange, buying London's premier oil contract Brent, the main U.S. soft commodity exchange and developing a large swaps clearing facility.

Six years ago ICE launched a U.S. crude oil contract based on the CME-owned New York Mercantile Exchange flagship West Texas Intermediate (WTI) contract, offering lower trading costs for dealers who traded both Brent and WTI.

After winning a legal battle with its rival over whether it could use NYMEX settlement prices, the ICE WTI contract now accounts for about one-fifth of the total WTI trading volume. But grains are a different market, and CME's dominance there is formidable.

"In the financial markets, the energy markets, metals markets ... primarily those are trading vehicles, and there is not as much cash activity that is based on the futures pricing," said Greg Grow, director of agribusiness with Archer Financial Services.

"In oilseeds, wheat and corn and feed grains, so many cash relationships are determined by CBOT pricing. So the settlement price at the CBOT is still an important component to the bid and offer schedules offered by elevators, merchandisers, users and others," Grow said.

DISTANT CHALLENGERS
The CBOT has faced challenges before, though none so direct or well-established as the ICE.

Exchanges in Kansas City and Minneapolis have traded different varieties of wheat for more than a century, but have not expanded much beyond that. Europe's NYSE Liffe exchange lists wheat and corn contracts, but both are dwarfed by CME's.

More recently China's Dalian Commodity Exchange has drawn attention, with trade in the soy complex surging amid speculative interest and increased hedging by the world's biggest importer of the oilseed. But trading by foreign firms is highly restricted, and growth has leveled off lately.

Despite the challenges, ICE does not have much to lose by launching the new grain contracts.

"What does it cost them? It's sort of like buying a cheap, out-of-the-money option," Pirrong said.

"You see this kind of thing (where) people take a punt on introducing new contracts. Usually it fails," Pirrong said, "but if it does succeed, it's enormously profitable."



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