Managing durum price volatility

Don’t be relaxed about marketing durum in the post-CWB monopoly environment, say grain traders and risk managers.

Durum prices can move violently, and marketing the crop isn’t always easy.

“It’s dangerous. It’s extremely dangerous,” Tom DeSmet of U.S. grain company Cenex Harvest States said during the Grainworld conference in Winnipeg.

“I don’t think a lot of people realize how dangerous it is because the CWB has been such a huge part of marketing durum for so long. They’ve taken that risk.”

That means farmers need to take durum risk management much more seriously, DeSmet said, which isn’t easy because durum is a small crop with only primitive risk management tools.

Marketing advisers say farmers must realize that the durum prices they saw through the CWB’s pool prices evened out much of the volatile price movements that can send durum prices soaring or crashing in any year. Pooling is a form of averaging prices, so farmers relying on pool prices couldn’t try to pick highs or sell out at sudden lows.

Some American farmers, grain companies and processors use the Minneapolis Grain Exchange hard red spring wheat futures contract to hedge durum prices, but many analysts say durum’s indirect relationship to spring wheat prices makes it a poor hedge.

Winnipeg’s ICE Futures Canada has launched a durum contract with much industry support, but it has seen almost no trading. It could also seem a risky hedging option for prairie farmers if it does not pick up trading volume.

Cash contracts with elevator companies are often used in the United States, but DeSmet said they also bring real dangers because of price volatility.

DeSmet offered a real example of a farmer who contracted durum at $9 per bushel, did not produce the quality needed for the contract’s specifications because of weather problems in the late summer and had to buy durum at $5 per bu. over the $9 contract price to meet the contract specifications because the market had risen.

He eventually received only a net $3 per bu.

“The problem wasn’t isolated,” said DeSmet.

“It was a huge problem in the industry.”

DeSmet said farmers need to keep in close touch with durum buyers so they know what current prices are and when it is possible to move the grain.

The price volatility means farmers need to be able to sell when they like the price and not assume those prices will remain.

Even if farmers are willing to sell at posted and rumoured prices, their local grain elevator often won’t be able to get cars to move the crop.

Combining price and ability to move is a key ability for a durum grower, DeSmet said.

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