ICE Futures Canada increased trading limits on canola last week to $45 a tonne from $30, but market participants are not sure if that’s a help or hindrance.
“It’s a bit of both. If you widen the range you increase the likelihood that the market will trade that day,” said Peter Rowe, vice-president of merchandising and transportation for Cargill Ltd. in Winnipeg, who added the expanded limits could also cause a few migraines.
“As you talk to a farmer about the price, you tell him the price right now and 10 minutes later the price could be $20 a tonne different. Or in this case, $45 a tonne different.”
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On March 14, ICE Futures raised the daily limits on all three Winnipeg contracts. The limits for western barley and domestic feed wheat, previously $10 a tonne, rose to $15 a tonne.
ICE Futures also announced if any two contracts in a specific commodity close limit up or down, it would expand limits in the next trading session. Canola limits would go to $60 a tonne, while feed grain limits would jump to $20 a tonne.
The action is in line with changes in U.S. markets. In February, the Minneapolis, Kansas City and Chicago exchanges increased limits for wheat contracts in response to an unprecedented rally.
On March 12, the CBOT announced new limits for corn, soybeans and soy oil, effective March 28. Corn limits will rise to 30 US cents per bushel from 20 cents, soybeans will go to 70 cents a bu. from 50 cents and soy oil to 2.5 cents per pound from two cents.
The changes are getting mixed reviews on both sides of the border.
“We’ve entered into a new realm of volatility and a new realm of prices,” said Tony Tryhuk, branch manager of commodity trading for RBC in Winnipeg. “Discovering a price (within) $30 of settlement is reasonable, when you’re talking about a $400 commodity. But when you double that, maybe you need more than a $30 gate to discover the price.”
Tryhuk said increasing the canola limits is a proactive move by ICE Futures, because restrictive limits can prevent the market from functioning.
“That’s what we saw in Minneapolis (in February) … when their existing limits didn’t accommodate any type of transactions,” he said.
On the other side of the argument are hedgers. They believe the larger limits will only exacerbate price swings, making risk management more difficult.
“The bigger limits go against what really needs to happen for a hedger out here,” Don Roose, an analyst with U.S. Commodities in West Des Moines, Iowa, told Reuters.
Roose’s colleague at U.S. Commodities, Dax Wedemeyer, said the expansion of limits puts pressure on producers, elevators and ethanol plants, having to cover larger margin calls.
For example, if corn went up the new daily limit of 30 cents a bu., an elevator hedging one million bushels of corn would be faced with a margin call of $300,000. With the old limit of 20 cents, it would have been $200,000.
So far, Wedemeyer said, none of his clients has had problems financing their market positions, because U.S. banks continue to provide backing.
“The banks seem to be doing fine … it’s a concern short term, but in the long run the banks see that it is a hedge.”
