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Market experts cautious of new contract

The international crop futures market is heating up with inter-exchange competition, but the most relevant new Canadian crop futures contracts still have a doubtful future.

Winnipeg’s ICE Futures Canada’s new contracts for milling wheat, durum and barley are seeing paltry trading with less than four months to go until the new crop year.

It has some marketing advisers sounding skeptical that farmers will ever be able to use the new Winnipeg contracts. However, most in the grain industry say there is still time for trade to be ignited.

“The longer it goes without any action, the less likely it will be a commercial contract, but there’s no cutoff date,” said analyst, hedger and trader John Duvenaud of Wild Oats, a market advisory firm. “The crop’s not even been planted yet.”

Derek Squair, manager of Agri-Trend Marketing, said he won’t consider putting farmers into the ICE milling wheat and durum contracts until there is a deep pool of liquidity.

“It would be very difficult for farmers to start using that,” he said.

“Right now, Minneapolis, Chicago and Kansas City (the locations of the three other North American exchanges that have wheat futures contracts) give us pretty good liquidity.”

However, ICE Canada president Brad Vannan said it might be too early to expect much trading: there is still little commercial trading of new crop wheat, there is no spot cash market for wheat yet, and there are no nearby contracts in operation.

“When wheat starts to trade in the spot and deferred markets, I’d expect to see volumes showing up,” said Vannan.

The greatest volume of trade in most futures markets tends to happen in the nearby month that is not on the brink of liquidation. Prices of the “front month” tend to be close to those in the cash market if the contract is operating correctly. For that, there needs to be a vibrant cash market.

If a healthy cash market is reflected in the nearby contract, then trade can develop for contracts for later months. Traders employ spread-trading strategies within the months as they attempt to speculate on market direction or jump on arbitrage opportunities.

Most of those features are now missing for the new ICE Winnipeg grain contracts.

As of April 23, only 74 contracts were open in the new milling wheat futures and 52 open in durum, compared to 236,347 open contracts in canola.

June is often cited in the grain industry as the “make or break” month for when the new contracts have to show some life. It is near the beginning of the new crop year and something about the size and quality of the crop can be assumed from early conditions. As well, commercial trading of the new crop becomes substantial.

Squair said that if the new contracts are to ever show any life, it will likely be November-January, when commercial activity and farmer selling is hectic.

However, he said he will probably continue to use U.S. wheat futures until the trade in the Winnipeg contracts is large enough to calm worries about liquidity. Even some U.S. futures are less liquid on some days than he is comfortable with, he added.

“We have our challenges with Minneapolis with the protein wheats there,” said Squair.

“We even do some spring wheats off of Chicago, as crazy as that sounds. But we just need liquidity (sometimes). Going one step further away from a liquid market (by using Winnipeg futures) is risky.”

Establishing a vibrant new contract is a daunting challenge for any market, and many new contracts have failed over the years.

However, there is significant worldwide demand for ways to speculate on crop prices for hedging and investing purposes.

As a result, new contracts were introduced recently at both ICE’s American exchange, which is planning to offer cash-settled contracts mirroring the CBOT’s winter wheat, corn, soybean and soybean oil futures contracts, and at the CBOT, which is offering Black Sea wheat futures contracts.

The ICE contracts aren’t just similar to the CBOT contracts, but are fastened directly to the CBOT settlement prices. They are designed to be most useful to large speculative users who do not want to be subject to the threat of delivery and who want easy interoperability with other ICE futures.

The CBOT Black Sea futures contract is designed to be useful for commercial and speculative users. Its main point is to be able to more accurately represent cash prices in the ports of the region where most Russian, Ukrainian and Kazakh crops are sold.

Traders now use either Western European or CBOT wheat futures prices to hedge Black Sea grain, but the basis levels between the futures delivery zones and the Black Sea ports can vary widely and reduce the effectiveness of hedging or speculating against the cash market.

Vannan takes solace in the thinking behind the new CBOT contract because it is what ICE is doing with the Winnipeg contracts.

“The same reason the CME (the owner of the CBOT) said we have to come up with a contract that reflects the parts of the Black Sea region is why we created the Canadian contracts, to recognize the importance and differences of the Canadian production region in global trade,” said Vannan.

“We recognized you need specific price discovery for Canada.”

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