REGINA – As a member of the Winnipeg Commodity Exchange committee that devised the original canola futures contract, Larry Weber finds it troubling to witness what might be its demise.
“Futures markets are broken. They are not working,” the Weber Commodities analyst told delegates attending the Canadian Renewable Energy Workshop.
There is no correlation between futures and cash prices anymore, he said.
When the original contract was created, the committee thought basis levels would fluctuate $20 per tonne either way. Recently, the basis was -$138 per tonne.
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“There is an absolute disconnect to cash,” said Weber.
The cash price should be indicative of what grain companies can sell a commodity for on the export market, but grain companies say they can’t sell grain at today’s inflated prices.
Meanwhile, he believes confidence in futures markets has deteriorated to the point where there is a greater risk in taking a position than sitting on your hands.
“I believe that the futures markets today are unhedgeable and you don’t know how much it pains me to say that,” said Weber.
There has been a mass exodus of grain companies out of futures markets in Canada and the United States. Western Canadian grain companies will only price out 60 days and the industry’s biggest players like Archer Daniels Midland and Cargill are no longer using futures as hedging mechanisms.
“That should be your first indication that it’s not working,” said Weber during an interview following his presentation.
Canola futures rose $312.10 per tonne between Nov. 2, 2007, and March 3, 2008.
“You would have had to shell out $312 a tonne just to maintain your hedge, which is huge,” he said.
And with the growing divide between cash and futures prices the hedge would have been useless come March 3.
“It’s something I lay awake at night and lose sleep over,” said Weber.
He told delegates attending the biofuel workshop it is something they should be fretting about as well. As commodity exchanges expand their daily futures trade limits, the exposure grows. Monitoring markets is now a full-time job.
One tactic ethanol and biodiesel plants may want to consider is entering into long-term contracts with producers. Weber knows of one Saskatchewan ethanol plant that locked in five years of production for $4.50 per bu., which looked like a gift to growers when wheat prices were $3 per bu.
“It doesn’t look like a gift anymore,” he said.
If biofuel companies go that route they should include a cost component for inputs, so farmers are covered if input prices soar over the length of the contract.
“There needs to be a cost of goods component or it’s not fair,” said Weber.
