The Federal Court of Canada’s decision to block the breaking of the barley monopoly sent barley futures prices plunging, right?The answer appears to be: Yes and No.
Analysts and traders agree that the sudden change in who had the right to market the crop caused a short-term sell-off of the Winnipeg Commodity Exchange’s barley contract.
But most say that barley was due to drop anyway, and the court decision had little if any impact on the real world price of barley.
“It snapped back pretty fast,” said broker Ken Ball of Union Securities.
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“A lot could be just psychological….Obviously somebody jumped in pretty fast to buy it up.”
Barley futures drop
After the court decision was announced, barley futures prices plunged by $10 per tonne over two days, before quickly returning to about the price trend barley had been following before the announcement.
Analyst Errol Anderson said the barley decision was a shock, but not the total answer to barley’s weakness.
“Court decision or no court decision, the barley market was apt to come down just because we’re in front of harvest,” said Anderson.
But he and Ball say that the killing of hopes for an open barley market mean that the liquidity-challenged barley contract will become even more thinly traded and volatile.
“It means western barley futures are really unpredictable right now,” said Anderson.
That’s because many of the players in the barley market were using it as an export contract, rather than a contract based on the western Canadian livestock feeding market.
Buyers and sellers were both assuming that prairie barley after Aug. 1 could be sold to American and offshore buyers, so when those presumed markets disappeared, the need for commercial hedging on possible sales also disappeared.
Speculators found they had nothing left to speculate with.
That is probably what was behind the sudden sell-off and today’s quiet market.
“The longs in the market immediately said ‘there’s no hope at this going any higher,’ ” said Anderson.
“The best case scenario is that the board could match, but there’s no way the board could be better in a pooling system. That really hammered the market.”
Hedging sales
Ball said some grain companies had bought barley futures to hedge exposure on barley sales they had made to foreign buyers, but the court decision meant those sales contracts were probably cancelled, so their futures contracts were hedging positions they no longer held.
They liquidated those hedges, and combined with speculators abandoning the market and thin trade, the price plummeted.
“In a small market like barley, it doesn’t take much,” said Ball.
“You would not have to have an avalanche of selling to knock the market down. The volume on those days wasn’t mammoth.”
Weakness in barley at this time makes sense because a new harvest is beginning to come in. Farmers need bin space and are clearing out old crop for the new crop.
Feedlot alley cash barley prices had been falling for days before the court decision, following the predictable seasonal pattern.
The tragedy for the derivatives market, Anderson said, is that western barley was becoming a much stronger futures contract, representing a world price, but now it will return to being a regional feed industry contract.
“If you keep the board (monopoly), you lose opportunities for (the American and export) markets, because if you have a dual market, you have more people looking and your market is going to get bigger,” he said.
“Basically it shrunk back down.”
