Farmers’ confidence is shaken in many futures contracts after the anomalies of the past two crop years.
But they are still useful hedging tools, analysts say, and should not be written off.
However, their problems should make farmers appreciate other forward sales methods, such as deferred delivery contracts, which don’t have the unique problems of futures contracts.
“We’ve seen a growth in forward contracts, especially in the small grains,” said North Dakota State University agricultural economist Bill Wilson in an interview.
“It’s a response to the problems, and I think it’s a response to buyers being exposed to risk and wanting to be covered.”
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Futures prices are the basis for most crop prices throughout North America and are the central feature of crop price hedging. The world’s first futures contracts were crop contracts in Chicago, and while the futures markets now trade contracts in many non-agricultural commodities, interest rates and currency exchange rates, the relationship of farming to futures is close.
However, in the boom years of the recent commodity rally a number of disturbing divergences between futures prices and cash/commercial prices appeared, causing unexpected losses to some users and unpredictable results for others.
The problem was especially bad in the Chicago soft red winter wheat contract, which had up to a $2 per bushel divergence from the cash market.
Wilson said the wheat contract was the worst situation, but many contracts saw cash-to-futures volatility increase, which undermines their usefulness for farmers trying to offset price risk.
For instance, until the past three years the Chicago corn contract has been about 90 percent effective in laying-off risk, but in the past two years that effectiveness has dropped to perhaps 60 to 70 percent.
“They’re still effective, but they’re not as effective as they traditionally were,” said Wilson.
Ken Ball, a broker with Union Securities in Winnipeg, said the lack of convergence with some of the big contracts worried many like him, but the problems seem to be settling down.
“Generally, they work pretty well,” said Ball.
“Canola works fine. Corn, soybeans in the U.S. work pretty well. Spring wheat seems to work fine once you adjust for protein factors.”
A particular concern is any problem with U.S. wheat futures, because they are the basis for some of the Canadian Wheat Board’s Producer Payment Options.
“If producers want to use the board’s pricing contracts, there’s a very tenuous relationship between the futures in the U.S. and the board pricing system, which can be a bit hard to manage,” said Ball.
Wilson said U.S. futures contracts are still valuable, but often they are not as valuable as a forward sales contract that offers the same price.
“Cash forward contracts are more valuable than hedging in the futures market,” said Wilson.
