Under the supervision of the Chicago Board of Trade (“CBOT"), Chicago Mercantile Exchange Group (CME - Analyst Report) has decided to start trading Short-Dated New Crop Options on CBOT Corn and Soybeans futures from June 4, 2012. However, the new options will be listed for trading on CBOT wheat futures starting September 4, 2012.
For Short-Dated New Crop Options on CBOT Corn and Soybeans futures contracts will be listed in May, July, and September. Short-Dated New Crop Options on CBOT Wheat futures will be listed in December, March, and May. These will be listed for trading on the CME Globex.
The Short-Dated New Crop Options is similar to CME Group's other liquid agricultural options. These are inclusive of the recently listed MGEX-CBOT Wheat Spread Options, standard or serial options, weekly options, calendar and other spread options.
This being the growing season, CME Group believes that the company will benefit from the increasing consumer demand for options to manage risk. Simultaneously, the commercial grain customers will reap the benefits of relatively lower pricing to offer their producers contracts at a reduced rate.
Challenging CME Group’s dominant agricultural market position, IntercontinentalExchange (ICE - Analyst Report) announced the launch of the trading of corn, wheat, soybeans, soymeal, soyoil and oilseed futures. The company has come up with around-the-clock trading, starting with Corn at a very low-margin at the same price level as the CME Group.
In a bid to grab a portion of CME Group’s market share, IntercontinentalExchange also competed against CME Group for the U.S. WTI oil contract, threatening to cannibalize its profit share as well. IntercontinentalExchange has also performed well in sugar, cocoa and canola futures. However, it has still a long way to go before standing at par with CME Group. Recently, its wheat and barley contracts failed to succeed in the Canadian Wheat Board's monopoly.
Consistent growth over the past four years is a positive for CME Group but mounting competitive pressure from IntercontinentalExchange will likely take a toll on the company. The company’s diverse product range contributes to an increase in overall trading volume but simultaneously, it is significantly exposed to extreme interest rate volatility, firm government regulations and limited credit availability in the current unstable capital and credit markets, which can hamper liquidity and lead to a decline in the customer demand lest this trade scenario continues or worsens in future.
The trading activity is inherently variable, both seasonally and cyclically, whereas many of CME Group’s costs are fixed. But the operating leverage is a key positive for the company.
We maintain a long-term ‘Neutral’ recommendation on the stock. The company currently retains a Zacks #4 Rank, which translates into a short-term Sell rating.