Lights out on wheat, durum, barley contracts

What happens when a mall begins losing tenants and dark storefronts begin appearing?

Shoppers will continue to go there for a little while, but there will be fewer of them, and then more shops will close and fewer and fewer people will visit the mall.

Eventually it will become like a ghost town and usually linger on pathetically for a few years until the property or lease owner throws in the towel and the place finally closes.

That just happened at ICE Futures Canada.

Its hallmark canola contract remains vibrant but on Oct. 26 the exchange announced it was delisting its milling wheat, durum and barley contracts, which had been comatose for some time.

Barley had suffered a long and sad decline, after operating for more than a century.

Spring wheat and durum never really got going, after being introduced following the demise of the Canadian Wheat Board monopoly in 2012.

There are some now obvious reasons why each of these contracts failed:

  • Nobody needed a Canadian spring wheat contract when the Minneapolis contract fulfills 90 percent of the role, and price discovery comes from many other sources, including the PDQinfo cash price tracking system.
  • The durum market has always operated without futures and with so few significant buyers and sellers, few saw the need for it.
  • Barley buyers and sellers have become comfortable with the well-functioning cash market with many new online ways to market the crop, and there are now so few and such big grain companies that few needed to rely on futures to hedge their risk.

In the end, liquidity is everything, and none of the ICE grains contracts had any.

The death of these contracts brings to a sad close another chapter in the post-CWB story.

There had been hopes that a robust free and visible market would evolve for the CWB’s commodities once the monopoly was removed.

Farmers would have had a hedging mechanism that would have replaced one of the primary functions of the board, and farmers would have ended up with far better price discovery.

Instead, grain companies and grain marketers began aggressively offering wheat and durum marketing opportunities, and the market moved from monopoly control to direct farmer-buyer interaction, jumping right over the place that ICE’s contracts were supposed to play a vital role.

Maybe the contracts would have worked if ICE had done something different. If somehow ICE, farmers or industry had managed to get enough people trading the contracts early on, more users would have piled in and the contracts could have become the primary pricing mechanism and benchmark that supporters and the exchange hoped.

But with almost no one trading them, they became worse than useless. They became dangerous. Farmers, marketers, users and speculators ran the risk of being caught in positions they couldn’t get out of and at prices that didn’t necessarily reflect the western Canadian cash market.

So everybody stayed away, and now the landlord has called it a day, turned off the lights for the last time and padlocked the mall’s doors.

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