Fighting for your business

The Grainworld conference in Winnipeg last week was bookended by presentations from two of North America’s four wheat futures exchanges. On the Sunday just hours before the conference officially began, the CME Group – the owner of the Chicago Board of Trade and its world-famous agricultural futures contracts – held an afternoon session talking about its wheat futures contract and how farmers up here could use it to hedge their crops. For the conference the CME had its manager of commodity products – a rather prominent person in the world of derivatives – present for a panel discussion.

On the Tuesday, just half an hour after the conference wrapped up, the Minneapolis Grain Exchange gave an afternoon presentation for farmers about the same subject. Included in their presentation was a discussion of cash futures contract by DTN’s Darin Newsom, an analyst I have often interviewed, and a general overview by Joe Victor of the exchange, a man I have interviewed dozens of times.

If farmers needed any proof that the grain world is excited by the prospect of the huge Canadian wheat crop moving into the open market, these visitors to Grainworld offered it. The Canadian crop is not a little thing. It’s big enough to tempt even the mighty Chicago – the titan of all global commodity exchanges – to come to Winnipeg to make a sales pitch. These guys are fighting for your business. Feel free to feel flattered, because it isn’t always easy to get senior derivatives market players to come to the Canadian prairies to hawk their wares.

As anyone who has heard my endless yammering knows, I’m a huge fan of publicly traded futures and options contracts. They aren’t just effective hedging mechanisms, but also the best example of the “invisible hand” of the marketplace producing a public good through the actions of thousands of selfish individuals. Because of futures markets, we get a true free market price for a lot of basic crops. Without futures, crops limp and crawl through a murky, dark world, with farmers never knowing if they’re getting offered fair-value prices. (Hello, special crops!) Futures markets make everyone equal, from the smallest farmer with 20 tonnes to sell to the largest multinational looking to hedge a million tonne purchase.

They truly are what is best about the free market, and we were blessed here in Winnipeg to have not just the head of ICE Futures Canada – the Winnipeg exchange – present for Grainworld, but senior representatives of two of the American exchanges.

Both the CME’s and MGEX’s presentations were well-attended by farmers, with a few dozen at each. (I went to the MGEX one). But that’s obviously far fewer than the thousands of serious commercial grain farmers who farm the prairies and could use these products. Some already know everything about futures and options trading and hedging. Others employ professional risk managers, such as brokers, to do their hedging for them. But I am sure thousands still have little knowledge about how hedging with futures and options really works.

Now is a perfect time to learn. With the old CWB stumbling towards a gaping plot in the marketing cemetery, the main hedging mechanism used by thousands of farmers will soon be dead. Farmers can simply grow the best crop they can grow, put it in the bin, then sell it whenever they need to or whenever they like the price, but for farmers sensibly concerned about hedging their financial exposure, and who don’t know much about hedging, now is the time to get acquainted with some basic concepts and strategies. (I know some of you out there think all big farmers know how to do their own hedging, but from personal experience of visiting lots of big farms over the years, I’ve found that many commercial grain farms don’t do much marketing planning or hedging at all. They are grain growers, not grain marketers.)

So here, for example, are a couple of resources free to anyone with an internet connection, both offered by the CME:

www.cmegroup.com/education

http://www.cmegroup.com/trading/agricultural/self-study-guide-to-hedging-with-grain-and-oilseed-futures-and-options.htm

So if you don’t know much about futures and options and what they can do to protect your farm, why not spend some time before the wheels get turning in the spring getting acquainted with derivatives strategies? Again, if you’ve heard my yammering over the years, you’ll know that I’m a big fan of options, and the CME particularly is good at providing free materials for people to educate themselves about these fabulous beasts which you can use as insurance against market volatility.

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