To reduce market risk, the Canadian Wheat Board has changed the pricing times for contracts linked to futures prices on the Minneapolis Grain Exchange.
As of Feb. 25, the pricing periods for the board’s fixed price and basis price contracts will run from 3 p.m. to 9 p.m. central time, Monday to Friday. The contracts allow farmers to lock in a price for their new crop of wheat, based on futures prices on the MGE.
Before this change, the hours were 2:30 p.m. to 7:30 a.m.
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“With the development of overnight electronic trading … that exposed the programs to trading risk,” said Maureen Fitzhenry, CWB spokesperson. “It increased our risk to cover short positions at the opening call of the day.”
Put another way, if overnight trading was pushing futures prices down, the board might not be able to hedge its contract with the farmer at the opening bell. In a worst case, the market could immediately go locked limit down (30 cents, 60 cents or more, depending on futures month and market volatility) and the CWB would be on the hook for the loss.
The change in hours comes on the heels of a Feb. 12 CWB decision to temporarily suspend the futures lock-in contract, resuming it the next day.
On that day, and many other days in February, the MGE was highly volatile, as spring wheat futures prices swung limit up or limit down.
In an interview afte r the suspension, Curt Denisuik, the CWB’s director of commodity risk management, said the board had to pull its contracts Feb. 12 because “it was unclear if we would have an opportunity to hedge any new signups.”
At that time, Denisuik said the CWB might pull the program again if an erratic market exposed the board to unmanageable risk.
A disclaimer on the CWB’s website, on the producer payment options page, confirms that policy remains, despite the changes in hours.
It says “the CWB reserves the right to withdraw these programs at any time, without notice, subject to market conditions.”
And another section of the same page says “if futures close limit down, the CWB may not offer prices for the affected months.”
In an interview March 3, Denisuik said the volatility is the “highest it’s been in the history of the market.” With limits raised in certain contracts to 90 cents, $1.35 or $2, the risk is “quite significant” for the CWB, he added.Â
Fitzhenry said the policy is needed to ensure the long-term integrity of the producer payment options.
“You can’t have large risk exposure. Ultimately it’s all farmers’ money and we have a responsibility to hedge our risk as responsibly as possible.”
The CWB has also announced it will not offer the March 2009 futures month for its basis price contracts. It said it would be available when there is “sufficient liquidity in the market.”
