Equal measures of hope and pessimism are greeting ICE Canada’s plans to launch spring wheat, durum and revamped barley futures contracts.
Many hope the Winnipeg exchange is successful, but most think it will be a tough challenge to make new contracts work and survive.
“I’m excited,” said Errol Anderson of Pro Market Communications in Calgary.
“As long as it’s got a good delivery mechanism, this could really begin to gain some value.”
Read Also
Ag in Motion innovation awards showcase top 2025 ag technology
The 2025 Ag in Motion Innovation Awards celebrated winners across five categories: agronomics, agtech, business solutions, environmental sustainability and equipment.
However, he and broker Ken Ball of Union Securities worry there aren’t enough active grain companies to make new contracts work for the crops the Canadian Wheat Board has previously monopolized. Other futures contracts collapsed when grain companies backed away from the market.
“Contracts that were active and effective (such as feed wheat, flax and barley) just were seemingly abandoned by commercial traders,” said Ball, who liked all those failed contracts and would like to see Winnipeg-based spring wheat, durum and barley contracts.
ICE chief executive officer Brad Vannan said the exchange wants to launch new contracts for Canadian spring wheat, durum wheat and barley if the government goes ahead with its plan to break the CWB’s monopoly for the 2012-13 crop year.
He said the contracts will be designed to meet each market’s specific needs: spring wheat can’t duplicate the three existing American wheat futures contracts and must match commercial users’ needs; durum will need to represent a world price to sellers and buyers and barley will need to be relevant to domestic producers, domestic users and international buyers and sellers.
“The Canadian farmer wants a level of transparency that he’s comfortable with,” said Vannan.
“I think transparent markets tend to be more efficient. That is one advantage that I hope to bring to the marketplace.”
However, the Winnipeg exchange has had problems in the past keeping futures markets such as flax and peas alive. As well, market experts say setting up new futures contracts is a daunting challenge.
“I’m always a little skeptical on new futures contracts until I see they have both speculative participation and commercial need,” said Nebraskabased futures market analyst Alan Brugler.
“Without the commercials, they won’t have enough volume.”
Brugler watched the Minneapolis Grain Exchange’s durum contract wither and die and said setting up a new one, even with a much bigger crop base to hedge, would be a challenge because many speculators and commodity funds won’t go near contracts that are small compared to the huge corn, soybean and wheat markets.
Without speculators, even commercial interest might not be enough because commercials tend to take one side of the market and investors the other side.
“In most of the contracts we look at, the commercials are the big short and the speculators are the big long.”
Canadian spring wheat is a bigger crop, but the market already uses the Minneapolis Grain Exchange to hedge some of it.
As well, Brugler said North America’s three existing wheat contracts mean spring wheat in Canada would need to be designed with uniquely valuable features to attract commercial users.
Scott Irwin, a futures market and contract design expert from the University of Chicago, said the odds of new Winnipeg contracts working are poor.
“In general, the history is that the odds of a new contract being successful in commodity futures are extremely low,” said Irwin.
“The vast majority fail.”
For instance, he said no one has been able to successfully launch a well-functioning South American soybean futures contract, and that crop is 60 million tonnes and a major export commodity.
However, Irwin said ICE Canada’s opportunity is greater now than in the past because changes in the North American grain industry have undermined the commercial functioning of some of the present wheat futures contracts.
As a result, a well-designed contract for commercial users in Canada could work.
“Underneath the surface, even for these acknowledged successful U.S. contracts, there are some long-term major structural problems with delivery systems that may provide an opening for a smartly designed contract to be competitive,” said Irwin.
“The timing is better actually than if they had done this 10 or 15 years ago.”
