Analysts say the fate of new Canadian futures contracts for spring wheat, durum and barley will depend on whether grain companies use them.
So it should please farmers hoping for successful contracts that Winnipeg’s ICE Futures Canada exchange will have some of those commercial grain interests inside the contract drafting room.
“Certainly it’s something we’ll be part of going forward,” said Tracey Thompson, Richardson International manager of corporate communications, whose company is on the exchange’s contract review committee.
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“We’ll be working through that committee to develop workable contracts and work to provide price discovery for producers in a post-single desk environment.”
The Winnipeg grain trade is tightly connected to the exchange, with many grain company and commercial interests sitting on its committees over the years.
However, that didn’t stop them backing out of futures markets when the contracts didn’t serve their needs.
Traders say viable and popular contracts for flax, peas and feed barley collapsed when grain companies stopped using them.
Most speculate that mergers that swept through the prairie grain industry in the 1990s eliminated many of the counterparties essential to a viable market.
Contracts survive only when there are buyers and sellers
“It certainly wasn’t the small traders who abandoned it,” said Ken Ball, a broker with Union Securities.
“It was the commercial traders who must have disappeared on it.”
Analysts and traders say strong commercial buying and selling is needed to provide liquidity.
Without liquidity, users become afraid they won’t be able to close out positions once they have taken one.
As well, bid-ask spreads become wide when liquidity is low, which drives traders to other markets, even if they are not exact duplicates of the commodity being hedged.
For example, many Canadian traders use Chicago soy oil options instead of Winnipeg canola options because the Chicago market is much busier.
That’s why Austin Damiani of Frontier Futures in Minneapolis thinks the Winnipeg exchange is unlikely to be develop a viable durum contract. Farmers might want to use it, and grain companies might be willing to try it, but there aren’t enough big commercial users to create enough buy-side demand.
“It’s dominated by one or two companies, so you don’t have the market participants that you need for contracts to work,” said Damiani.
“These buyers don’t need the function of price discovery because they are the market.”
However, Thompson said companies like hers are keen to work with the ICE exchange to prepare risk management mechanisms before the Canadian Wheat Board’s monopolies disappear in 2012-13.
It is important to develop tools for farmers to use, regardless of whether they use the wheat board or the open market, she said.
“The government has certainly made its intention clear, and I think it’s certainly only reasonable that market participants participate in the process and start looking at what the alternatives will be for farmers.”
