Gimme Grain!

At 9:28 a.m. thirty-one grain traders are milling around a trading pit—an octagon about the size of a pontoon boat, recessed into the hardwood floor—at the Minneapolis Grain Exchange. Steps are wide and lazy, chests are thrust outward. Several of the men (and they are all men) discuss the price of downtown real estate; a few ruminate on Gophers football; nearly everyone chews gum, frantically. Then, at five seconds before 9:30, voices trail off, order books open, and feet are squared. A deep breath passes over the assembly and there’s a brief silence as attention focuses on the flutter of international commodity values changing on the price board above.
At 9:30, exactly, a bell rings.

“Half! Half! Half!” screams a muscular trader. His face is three inches from that of a man ten years his senior, who calmly scribbles something into a notebook. Nearby, a man in a red-and-black-checked coat bellows “Quarter!” as four traders crash toward him at the edge of the pit. Others collapse into scrums of shoving, screaming, raised arms, and pointed fingers—despite the fact that the trading floor surrounding them is a third of an acre of mostly empty, silent space. Things continue like this for roughly ten minutes, during which time approximately ten million dollars in business is done. Then, almost as suddenly as the action erupted, it subsides, and the traders mostly just stand around, watching the price fluctuations in Kansas City and Chicago, and occasionally calling out offers. By the end of a four-hour trading day, an average of a hundred million dollars has been transacted this way.

For nearly as long as there has been a City of Minneapolis, the trading floor of the Minneapolis Grain Exchange (known as MGEX) has been located just blocks from the Mississippi River and its flour mills. But unlike the mills, which now function largely as shells for high-end lofts, MGEX has continued to thrive as a grain-based business. In fiscal 2005, alone, nearly twenty-five billion dollars in business was transacted there, most of it centered on the spring wheat that has been grown and milled in the Midwest since farmers began homesteading here in the mid-nineteenth century. And despite the advent of electronic trading and international commodity markets, most of that twenty-five billion dollars was shouted out by a few dozen Minnesotans who regularly show up to use methods and rules first devised when the exchange was founded 125 years ago.

During the 1870s, when Minneapolis mills became the primary destination for the burgeoning Midwest wheat harvest, the Minneapolis Millers Association colluded to fix the price of the grain. Enforcement was efficient and brutal: Member mills simply refused to buy grain from any trader competing with an association agent. Enter Colonel George D. Rogers, a young grain trader from Calmar, Iowa, who arrived in Minneapolis in 1873. Determined to compete, Rogers skillfully undercut the Millers association’s pricing and thus established himself as a rare independent Minneapolis grain trader. Nevertheless, Rogers knew that he could never fully defeat the Millers unless there was a centralized Minneapolis grain market and exchange where business was conducted in the open, out of the backrooms favored by the Millers.

During the summer of 1881, Rogers recruited a group of Minneapolis businessmen to organize an exchange, and on October 6 that year, twenty-one men signed the articles of incorporation establishing the Minneapolis Chamber of Commerce (the name was changed to the Minneapolis Grain Exchange in 1947). Within six months the chamber had 538 members—and enough money to build a headquarters, which was completed in 1884. The Exchange moved into a larger and quite lavish new building at Fourth Avenue and Fourth Street in 1902, which cost $700,000 and included interiors by John Bradstreet, the renowned local arts and crafts designer. The Chamber was justly proud of its edifice, and sang its praises in a commemorative booklet. “Its lines are beautiful, its proportions unassailable, its detail highly attractive,” claimed the author. “In fact it is, architecturally, a constantly increasing pleasure.” Pleasures aside, the building was also designed to be practical, modern, and masculine: “There is a stairway, but it is inconspicuous and little used—only fast elevators are equal to the demands of the grain men.”

Early photos of the Chamber show dozens of traders in stiff collars and bowler hats crowded among rows of massive, altar-like wooden tables piled with samples of Midwestern grain that was in transit to Minneapolis. “The old-time buyers used to look at the actual grades,” said Randy Narloch, a trader with Archer Daniels Midland Company and a board member of MGEX. “They’d see it, smell it, even taste it.” Today, MGEX’s cash trading tables still cover more than half of the trading floor, but even when the action in the trading pits is loudest, the tables are almost completely empty. “Well, you can get a lab report on a sample faxed or emailed to your office,” Narloch sighed. “There just isn’t much reason to go down there anymore.” No surprise, General Mills and Pillsbury trust lab reports more than they do the senses of their grain traders, however experienced.

Economic trends, too, have contributed to the decline of the rather quaint practices of the cash traders: With the advent of agricultural giants like ADM and Cargill, the small-scale, independent grain-trading company has become a thing of the past. “We lost a lot of companies to consolidation over the last twenty years,” Narloch pointed out. “Pillsbury, International Multifoods, Kellogg. Now we have maybe ten players.” Of them, “five or six” account for ninety percent of the business at MGEX’s once-crowded cash trading tables, their conversations occasionally pierced by a cry from the futures trading pits at the other end of the trading floor.

Indeed, if MGEX merely served as a clearing house for grain shipments negotiated at cash trading tables, it would have disappeared long before the agricultural consolidations of the last twenty-five years. But grain traders and farmers are always looking for ways to manage the risk of price fluctuations between, say, planting and harvest, or shipping and delivery. As a result, in 1883, only a few years after its founding, the Chamber of Commerce authorized the trading of “futures”—essentially, a contract to buy or sell something in the future—as a hedge against the risk of price changes. Thus, a farmer concerned that the price of wheat will fall between planting and harvest can buy a contract to sell wheat at the current price before planting the crop (this is one kind of hedge; textbooks have been written about others). MGEX has marvelous archive photos dating back to the early twentieth century, and in them the blurry hands and frantic faces suggest that the business has always been loud, fast, and bruising, despite the stiff collars and Midwestern stoicism exhibited by the earliest onlookers leaning over the visitors’ balcony. A hundred years later it’s still more NYSE—New York Stock Exchange—than Minnesota Nice, with “fisticuffs every three years,” according to Mark Bagan, president of MGEX and a former floor trader.

Every weekday, from 9:30 a.m. to 1:00 p.m., MGEX’s spring wheat futures contract is bought and sold by floor traders on behalf of themselves and clients worldwide. The futures is also popular among speculators, who trade it with little concern for their underlying commodity content. In fact, only around one percent of the contracts traded at MGEX actually result in the delivery of a train car full of wheat, and that’s because most traders regard a futures contract as merely something to trade. “It’s definitely a Type-A environment,” said Bagan. “But I don’t like to call it gambling. I call it risk management.” Whatever it is, speculators assume the risk that others hedge, and Bagan is quite clear that risk has its downside. “For every dollar made, a dollar is lost,” he said. “For every guy that makes it big, three don’t. That’s why you don’t want to get too close to anyone: You don’t know if he’ll be here tomorrow.” And if he’s not there tomorrow, members of the Exchange will be more than happy to bid-up his membership: In the last twelve months, a seat at the Exchange (they are fixed at 391) has more than doubled in price to fifty-five thousand dollars. Some members have more than one, and many never even set foot on the floor. “It’s a good investment,” Bagan said, by way of explanation.

For a guy who was once in the trading fray himself, Bagan, who is forty-one, cuts a dashing figure: He wears good suits, his goatee is meticulously groomed, and he is soft-spoken and unfailingly polite. Nevertheless, he is an unabashed booster of the “open outcry” trading that occurs in the Grain Exchange’s futures pits, even as electronic trading overtakes the international commodities markets. In fact, ninety percent of the business done at MGEX is open outcry, despite the fact that the MGEX futures contract is available to trade electronically, worldwide. “If you know that a guy works for Cargill and you can look him in the eye—” Bagan shrugged. “That’s the sort of information you just can’t get sitting at home, trading on your PC.” He leaned against the rail of the visitor’s balcony and looked down at the trading pit. “Change isn’t always good,” he concluded with a smile.