Iowa Public Television

 

It's Like an eBay for Agriculture

posted on October 27, 2006


Last week, the Chicago Mercantile Exchange announced its plans to purchase the Chicago Board of Trade for $8 billion. The move will create a worldwide derivatives exchange with an average trading volume of nearly 9 million contracts per day. The new organization will be named CME Group Inc. and will stay in Chicago. The transaction is expected to close by the middle of 2007, pending approval by regulators and shareholders of both companies and CBOT members. Those lacking the know-how -- or the stomach -- to trade futures, often employ other marketing strategies. And as Market to Market reported earlier this year, that doesn't necessarily mean settling for a lower price at the local elevator. A case in point can be found in an innovative Web site for traders of value-added agricultural companies. Nancy Crowfoot explains.
It's Like an eBay for Agriculture Steve on phone: "You'd have to bid at least 6,000 to get anything as it is now."

It may not look it, but this is a busy day of stock trading. People are phoning in …

Jim at computer: Create an offer to buy"

… or bidding online – for stock shares in certain value-added agribusinesses listed on what is called an Alternative Trading System.

Conducted much like the popular eBay auction Web site for consumer products, AgStockTrade.com lists available stock from shareholders in a half dozen or so small agricultural businesses that produce pasta ... soybean oil ... or ethanol.

Greg Wilson, Pres. And CEO AgStockTrade.com, Sioux Falls, South Dakota: "Most of our companies trade on a trimester basis where they're actually active trading for 60 days and then we come off trading for an actual 60 day period of time."

It may sound convoluted, but because many of the regional agribusinesses operate under the structure of a Limited Liability Company, or LLC, they are prohibited by IRS rules from trading daily -- like corporate structured companies listed on the New York Stock Exchange or NASDAQ.

Greg Wilson, President and CEO, AgStockTrade.com, Sioux Falls, South Dakota: "When somebody puts their shares in the system, they have to sit there for 15 days so this gentleman put his shares on the first of May and they are eligible on the 15th of May at 5:00 on the 15th of May those shares will match if there is a buyer that is equal to or greater than what he wants."

Greg Wilson, President and CEO of a securities firm in Sioux Falls, South Dakota, set up a Web-based trading system after an inquiry from one of his clients. A 40 million gallon a year ethanol plant 45-miles north of Sioux Falls, switched its business structure from a cooperative -- to an LLC -- and wanted to provide its members the ability to trade their stock shares in a larger-than-local market.

Alan May, Membership Coordinator, Lake Area Corn Processors, Wentworth, South Dakota: "Well, back in the cooperative days, it was nothing more than a sealed bid process. In the cooperative days, we had very, very low turnover of shares. The decision was made to go to an LLC to attract outside investors."

Alan May says the Internet trading site has helped attract investors from more than 15 states ... but adds, trading volume is low. With more than 29 million 600,000 outstanding shares, less than 1% is traded each trimester. However, he quickly credits the auction-type setting with helping to increase the value of the stock six-fold since 2002.

Alan May, Lake Area Corn Processors/Dakota ethanol: "In the fall of '02 shares were split 4 to 1 so that put the original part of value to 50 cents. Our last trading session we traded up as high as $2.96.

They have essentially doubled in the last year."

Iowa State University professor of economics and finance, Dermot Hayes, says an Alternative Trading System such as AgStockTrade.com can be beneficial for both LLCs and investors.

Dermot Hayes, Iowa State University, Ames, Iowa: "If you're thinking of setting up an LLC, that lack of liquidity is a problem for you because let's say you want to get 100 people to give you $25,000 each and you tell all those people that over many, many years we're going to make you some money and you'll get your $25,0000 back as dividends. Some people might say, 'Well, I'd like to have a way out."

Greg at computer "These are the offers to buy and offers to sell."

AgStockTrade.com's Greg Wilson – who charges up to a 3 percent commission per trade -- offers the way out –for a handful of LLCs ...and at least one corporation. This North Dakota pasta plant switched from a cooperative to a corporate business structure in 2002 and could obtain an IPO to be listed on a national exchange. But company officials told Market To Market, they chose to list on the Web site, while they consider the potential benefits and pitfalls of trading on a national scale.

In the meantime, the Alternative Trading Web site offers Dakota Growers Pasta -- and other companies -- the liquidity sought for their shareholders.

Greg Wilson, AgStocTrade.com, Sioux Falls, South Dakota: "they wanted to offer their members some sort of liquidity. We'd like to be their exit strategy when people buy those shares and want out."

Jim Wilber types bit in computer: "So I go two."

Those who want out are finding willing buyers like Jim Wilber ... who has been bidding on shares in area ethanol plants since AgStockTrade.com went online in the fall of 2002.

Jim Wilber, Dell Rapids, South Dakota: "Well, it's quick. He's got it set up on his computer, how you can watch, how the trading history has been and it seems, I've been happy with the results."

On the Web site is a history of each company's number of shares traded -- and the prices the sellers received.

Jim Wilber: "Gee I got 20 seconds here. Should be okay."

Off camera: "Somebody just bid $2.31."

Jim: "Really?"

The electronic exchange provides greater volume of traders which can translate into price discovery on a stock's value. For example, on this day shares in a South Dakota ethanol plant started at $1.90 – and sold for $2.31 just 9 seconds before the 5 PM market close.

Greg Wilson, AgStockTrade.com, Sioux Falls, South Dakota: "A seller in theory could have put these shares in the local newspaper saying I want to sell my shares at $1.90 and somebody would have called and they probably could have arranged a price at $1.90. But being on the interactive system, buyers were able to come in and actually bid those shares up to $2.31. So he got 41 cents more than he had really wanted on the auction itself. It drives a market to where fair market is."

In the first six months of 2006, the On-line trading system received 493,000 visits and conducted more than $18 million in trade transactions. That's already more than double the trade dollars of all of 2005.

With such attention being paid to this 3-year old Web site – particularly to the alternative energy companies such as ethanol -- Wilson hopes to expand his on-line trading site to include other energy interests such as biodiesel and wind power.

For Market to Market, I'm Nancy Crowfoot.


Tags: agriculture markets news technology trade