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Interest in new contracts essential

Prairie farmers could soon benefit from two re-energized institutions that have long been at the centre of prairie crop pricing and marketing.

Or they could see these institutions fade and fail and the new post-monopoly environment become decidedly less farmer-friendly.

If either manages to repackage itself successfully, it could become central to how thousands of farmers price, hedge and sell their crops.

I’m talking about Winnipeg’s commodity exchange, now called ICE Futures Canada, and the Canadian Wheat Board.

Both have played crucial roles in revealing crop prices to prairie farmers: the exchange since 1887 and the CWB since either the First World War (early attempts) or 1935 (permanent establishment).

Right now, the exchange is promoting its new futures contracts for spring wheat, durum and barley, while the CWB is telling farmers about its new suite of marketing programs.

Farmers have a lot at stake here.

They’ll be looking through a glass darkly at wheat prices if the exchange fails to make these new prairie-based futures work because they will have to watch U.S. futures prices, back them off to prairie locations and realities and calculate foreign ex-change impacts.

There are no U.S. futures for durum and barley, so for those crops they would be stuck calling elevators and being told the price.

The futures seem sound in design, being based on the popular and successful canola contract, and should truly represent prairie prices, if anyone trades them.

Trade of the new futures contracts has been weak, to the say the least, with only a handful traded in their first week of existence.

It’s certainly not encouraging, although not necessarily unexpected because they are new-crop contracts and most futures trade is always with nearby months.

Analysts and brokers have told me they’re not worried, yet, but at some point people need to start buying and selling these things or they will fail.

Right now everyone seems to be waiting for someone else to go first.

Farmers are unlikely to play much of a role here because they are tiny players and the contract size of 100 tonnes is too big for many farmers until it’s obvious there’s enough trading to allow them to get out of positions when required.

The wheat board is at an earlier stage of reformation, with just bare details of its new programs available now, and a series of layoffs expected to continue as the organization skinnies itself down for a reduced role.

But the outlines of its new programs are encouraging and show the board is going to fill a much-needed role: hedging and professional crop sales advisory services.

The point of the old board was the premium it said it gained from its monopoly, but the point of the new board seems to be its ability to offer pricing and hedging services that farmers can trust.

The CWB will still be working for farmers rather than shareholders, and still be selling farmers’ grain directly rather than just flipping it. As a result, its people might seem more trustworthy than the agents who work for other profit-driven companies.

The board has a squad of farm business representatives who have been working with farmers for years with Producer Payment Options, so they should easily become agents of the new order. Thousands of farmers trust these people.

The board has the ability to move into marketing and hedging crops beyond wheat, barley and durum, and it would make sense to do so. Why have one adviser for grains and one for everything else?

That might seem to put the new board into conflict with private farmer advisory services and brokers, which have grown fast and developed well in recent years as farmers have become more professional with their risk management.

In reality, most farmers still don’t take risk management anywhere near as seriously as they should, so rather than slicing up today’s hedging pie into smaller slices, the CWB’s role is likely to stretch the hedging pie much wider and give everyone a bigger bite.

Lots of farmers distrust and dislike private sector marketing folks, whether with grain companies or marketing companies, so the CWB’s emergence as a general crop marketer probably wouldn’t steal much from anyone else and would bring a lot more people into the world of serious marketing.

The CWB has longer to get its act together, at least on the advisory side if not the grain sales side, because most farmers don’t want to sign grain sales contracts when they don’t know what the premiums and discounts will be for not hitting contract specifications. That will be the situation for months, so they’ve got time to get it right.

The commodity exchange, on the other hand, needs to quickly convince farmers, grain companies and speculators that its new contracts are viable and a good way to hedge price risk.

It doesn’t have to do that overnight, but soon everyone’s going to want to see significant trade on a daily basis in the contract, or they will probably fade away.

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