The world price of durum has sunk from public sight, leaving Canadian farmers more exposed.
Citing lack of industry interest, the Minneapolis Grain Exchange has delisted its durum futures, a contract for which the Canadian Wheat Board had high hopes.
Without the Minneapolis durum contract, the wheat board will have trouble hedging sales with durum buyers, won’t be able to take advantage of futures price fluctuations and will take on more risk when offering durum pricing options to prairie farmers.
The Minneapolis exchange was also the only place where durum was openly traded, allowing anyone to see the free market price for the grain.
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“We’re sorry to see it go, but commercially it just wasn’t used,” said Curt Denisuik, wheat board director of commodity risk management and a member of the Minneapolis exchange board of directors.
“We tried to encourage its growth but it never caught on.”
Denisuik said the wheat board has used the durum contract to protect durum sales agreements, but often had difficulty finding anyone willing to take the other side of the contract. It also found it difficult to close out positions because so few people were trading the contracts.
Futures contracts allow users to guarantee a certain price return for a purchase or sale of a commodity. Canola futures are used by many prairie farmers to protect their eventual sales prices, but wheat and durum futures are almost never used by prairie farmers because of the wheat board pooling system, which takes pricing and sales decisions out of the hands of individual producers.
But the wheat board extensively uses futures contracts to protect its sales and pricing decisions. About 45 percent of wheat board sales contracts with buyers are basis contracts, which lock in a premium for wheat or durum over the world price, but leave the underlying price floating.
The wheat board and the buyer can then set the underlying wheat price up to the time of delivery by taking futures positions.
The wheat board is a heavy user of the Minneapolis hard red spring wheat contract, which uses wheat grade specifications close to Canada Western Red Spring grown by prairie farmers. The Minneapolis hard red spring wheat contract is that exchange’s dominant contract, much as the Winnipeg Commodity Exchange is dominated by its canola futures.
The durum contract, introduced in 1998, never caught on. Denisuik said open interest often lay at under 100 contracts in the past two years, and “when you get down there, it gets pretty risky.”
The contract was born just as some of its buying-side demand died, Denisuik said. A major American durum miller, Hershey’s, had promoted the idea of a durum contract so it could hedge its durum purchases.
But Hershey’s then sold its durum milling operations and few other processors showed an interest in the contract.
The contract’s original specifications were for a high-quality durum, which was hoped to represent the cash market well. But few end users used the contract because they felt it was not accurate enough and that there was not enough convergence between the cash and futures prices.
The Minneapolis exchange tried to reignite interest by lowering the standards, but “that seemed to make things worse,” said Denisuik.
With less interest in the contract, the board became increasingly exposed in its positions, which led it to back away from the contract.
The board now loses a tool that has helped it offer durum pricing contracts in its producer payment options program. Denisuik said the board can reduce its exposure in this program by cross-hedging durum with hard red spring wheat futures, but “it doesn’t correlate all that well.”
The board also uses futures contracts to take advantage of price opportunities that occur when futures prices diverge from the board’s analysis of the market. But for durum, that opportunity is now gone.
Denisuik would like to see a durum contract reintroduced on the Minneapolis exchange, but there is no point doing that until processors are willing to use it.
