Most farmers might not use the new Winnipeg Commodity Exchange canola meal contract directly, but it will probably stabilize input prices for dairy and pig producers, says the exchange’s head economist.
The contract, expected to be used mainly by canola crushers, feed mills and processing companies, will allow buyers and sellers of canola meal to lock in future prices, said Lyndon Peters.
“At a minimum, it’ll provide them with some price discovery,” said Peters, a few days after the new futures contract was announced.
“They’ll also be able to lock in feed prices.”
Read Also
Political parties condemn tariffs
Political leaders across party lines are demanding immediate action from Ottawa in light of China’s new tariffs against Canadian canola.
The contract was created to deal with the price volatility between soybean meal futures and cash canola meal prices. There should have been a predictable price spread between the two, but there wasn’t.
“We discussed it with the trade, and they said ‘Yeah, there’s a lot of basis volatility,’ ” said Peters.
Canola crushers, the supply side of this contract, live in an industry that often has wide spreads in profit margin. Being able to use a futures contract to neutralize swings in canola meal values will remove some of their risk.
“Any ability of them to lock in crush margins likely is something that would be of interest to them,” said Peters.
Meal buyers, the demand side of the contract, will also probably be keen to protect their prices.
The mere existence of a futures contract will give meal buyers, such as feed mills, a good sense of future price direction, Peters said.
But if they actually use the contract, “they could be in a better position to price their feed rations to producers or to lock in not only supply with processors, but also lock in prices.”
Livestock producers who use canola meal could see feed mills offering stable future prices. The mill would be able to do this because it would neutralize its risk that the meal price could rise by taking out futures positions.
Or farmers could find packers offering contracts that provide a margin tied to feed costs. If feed costs rise, the sale price goes up. The packer would be able to do this by hedging its risk in the futures market.
Peters expects the contract to also draw speculators once enough people are buying and selling canola meal futures. The reason for the contract – the volatility between soybean and canola meal prices – gives speculators something on which to gamble.
“Commodity hedge funds look at that as an opportunity,” said Peters.
But with both canola meal suppliers and users interested in protecting their future prices, Peters expects the new contract will mainly be a place where people interact.
“Just like our canola market, it’s really there because of the commercial reasons for it,” said Peters.
The contract will be traded and margined in U.S. dollars. It will have eight delivery months: October, December, January, March, May, July, August and September.
The par region covers the grain growing areas of Manitoba and Saskatchewan east of Prince Albert. A $5 premium applies to canola meal west of there.
The daily price movement limit for the 20-tonne contract will be $20 (US) per tonne above or below the previous settlement price, with a minimum price fluctuation of 10 cents per tonne.
The last trading day for the contract will be the business day prior to the 15th calendar day of the delivery month.
The specifications for bulk canola meal are minimum 34 percent protein by mass, minimum two percent oil by mass, maximum 12 percent moisture by mass, maximum 12 percent crude fibre by mass, and maximum 30 micromoles per gram sample of glucosinolates.
Canola meal delivery certificates are not redeliverable against subsequent futures months.
The meal must be loaded out-picked up within a 20 business-day shipping period beginning on the 12th business day after the last trading day of the delivery month.
