Proponents of a plan to create a new agricultural commodity clearinghouse hope to have a pilot project running in 2008.
In discussions with producers, they’re emphasizing the role a clearinghouse can play in promoting the use of forward contracts, to the financial benefit of buyers and sellers alike.
The security offered by the clearinghouse could help farmers and grain handlers obtain bank financing, said Russ Crawford, a Calgary consultant working on the project.
“The clearinghouse provides guaranteed 100 percent assurance that the seller will get paid on the day they’re scheduled to deliver, and the buyer is guaranteed delivery,” he said.
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“The idea is they can take that guarantee to the banks for financing. For farmers, they can improve their short-term cash flow.”
Crawford and his colleagues on the project are trying to persuade the banks to treat forward-contracted grain held on the farm as an asset on the farmer’s balance sheet.
Banks currently treat inventory as a liability, reflecting the risks associated with changes in price and quality.
“By securing it through the clearinghouse and guaranteeing payment, it should be looked at as a positive.”
Based on feedback from farmers attending focus group meetings, it appears that about 50 percent of the grain and oilseeds marketed outside the Canadian Wheat Board is forward contracted.
However most farmers view it as a logistical tool to deal with space and delivery issues, not a financial tool.
“They’re not using it to capture value and we’re trying to demonstrate that value,” Crawford said.
As the grain handling system continues to shrink, there is a greater onus on producers to carry inventory on their farm, which may mean spending money on bins and storage facilities.
That makes it even more important that producers extract value from that inventory through forward contracting, he said.
Modeled in part on the Calgary natural gas exchange, the clearinghouse project is being developed with federal government money through the Private Sector Risk Management Partnership Program.
The project is sponsored by the Western Barley Growers Association, although Crawford said wheat and flax grower groups are also involved.
He said they hope to have six or seven commodities on board by the time the pilot project is ready to go.
“If you can get more volume with the same fixed cost, it increases your chances of success,” he said.
The group is finishing a business plan to present this summer to potential operators of the clearinghouse, including trading exchanges in Winnipeg, Toronto and Montreal.
The clearinghouse would use money put up as margin by individual buyers and sellers, perhaps 10 to 15 percent of the value of a contract, to guarantee performance on a transaction-by-transaction basis.
Farmers have said in focus group discussions they’d be willing to pay a registration fee of up to 40 cents a tonne.
Another option would be to set the fee at a percentage of a commodity’s value, to reflect relative risk.
Besides assisting with forward contracting, the clearinghouse proposal would offer other benefits, said Crawford:
- Arbitration procedures.
- Standardized contract rules.
- Impartial conflict resolution.
- Continuous monitoring of risk exposure.
- Increased confidence between buyer and seller.
When the proposal was unveiled last summer, promoters focused on its role for issues related to the Canadian Grain Commission’s licensing and bonding system.
However, after discussing the plan with farmers, they’ve decided to place more emphasis on the financial benefits gained by forward contracting through the clearinghouse.
Crawford said education and marketing efforts will be required before the clearinghouse opens for business, noting that many producers have difficulty grasping how the concept works.
He compares it with a credit card system that enables buyers and sellers to engage in transactions even though they know nothing about each other, confident that the transaction is backed up by a number of other players behind the scenes.
