Pea contract gets mixed grades
A year ago this month, the Winnipeg Commodity Exchange introduced the world’s first feed pea futures contract.
Twelve months later, it is getting a mixed report card from those who trade it.
Success of futures contracts are judged on several points: Futures and cash prices should track together reasonably closely; the cash and futures price should converge in the delivery month; and there should be liquidity, meaning there should be enough buyers for the number of contracts offered for sale.
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On the first two points, the contract is performing well.
Sandra Craven, of Growers Marketing Service in Winnipeg, says the futures price has a close relationship to the cash price in the big feed ingredient market of northern Europe.
Peter Lloyd, director of marketing for Xcan Grain in Winnipeg agreed, adding the cash and futures are converging when they should.
The problem is liquidity and here the report card must say “student needs more work.”
In the canola futures market there can be tens of thousands of open contracts listed with the exchange, but the pea contract usually lists only hundreds.
In other words, very few in the industry – farmers, middlemen contractors and end users – are using the contract to protect themselves.
Dennis Popowich, vice-president of Mid West Grain in Yorkton, Sask., tried the contract in its early days and was disappointed.
“The biggest problem for a small guy is that it is really (not liquid). It’s useless,” he said.
There simply are not enough buyers to meet every seller.
Popowich believes part of the problem is speculators who grease the wheels in other markets are not active in peas.
Another problem, according to Craven and Lloyd, is that European pea buyers have traditionally used means other than commodity markets to reduce risk of price swings.
The European buyers are feed manufacturers. Peas are just one component in their protein formulations.
Peas compete against soymeal, feed wheat, tapioca and even orange peels. If one gets too expensive, it is replaced with a cheaper one.
But Craven said there are indications the Europeans are watching the Winnipeg pea market and are being influenced by its price trends.
Maybe when it is time for the second report card, we’ll know if they’ve started buying and selling contracts. If so, the new market will get a passing grade.
