Tony Tryhuk knew it had been a slow year for traders at the Winnipeg
Commodity Exchange, but he was shocked when he calculated his company’s
annual results for the year that ended Oct. 31.
RBC Investments trades futures and options at the exchange. Tryhuk,
manager of trading, saw the company’s canola futures trade in 2001-02
fall 21 percent from the previous year, its canola options trade fall
74 percent and its flax volume fall 56
percent.
“Man oh man, are they ever taking it on the chin,” Tryhuk said.
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“This can’t simply be the drought.”
Many in the grain industry are wondering what can explain the collapse
of trade volume in so many of the exchange’s contracts.
“I have no idea exactly why,” said Ken Ball of trading company Benson
Quinn GMS.
October 2002 was a dismal month for all exchange contracts except
canola, which only fell slightly.
Canola meal volume dropped by about 82 percent, flax fell 65 percent,
barley 43 percent and feed wheat 69 percent.
Traders and others speculate the slump comes from several factors,
including the Agricore-United Grain Growers merger a year ago, this
year’s small crop and contract design problems. However, there is no
consensus on which factor is the most important.
Exchange economist Lyndon Peters puts the blame on the small crop.
Grain companies have little grain to buy from farmers or sell to
customers and so have little activity to hedge by buying futures and
options.
“It’s just related to the amount of activity in the underlying cash
market,” Peters said. “With that decline in the level of trade going
on, there’s less of a need to actively hedge those commodities.”
He said canola futures volume has dropped less than feed grains because
speculative trading in canola fills in some of the gap. If canola
futures volume had dropped at the same rate as commercial activity in
the cash market, futures would be off by half. However, speculators
stepped in. That rarely happens in wheat and barley.
“We just don’t have the same amount of speculative activity in feed
grains markets,” Peters said.
Canola options volume has also slumped, down 88.9 percent this October
compared to last October and down 81.3 percent in the year-to-date.
Peters said that is also a sign of decreased commercial activity. Few
speculators use that market.
But the slump in flax futures isn’t explained by the drought, because
flax was not nearly as affected by western prairie conditions as other
crops. Yet there was almost two-thirds less trade in flax futures in
October 2002 compared to October 2001.
Traders and analysts say they think a complex mix of contract design
factors, changes in the flax industry and the Agricore United merger
are behind the fall in flax volume. It has fallen so much that some
traders don’t like using the contract.
The exchange and industry will debate the first two problems this
winter, but they won’t be able to overcome another factor – last year’s
Agricore-UGG merger.
It was followed by AU absorbing Xcan Grain, which had formerly acted
independently from its owner, Agricore. As an exporter, it would use
futures and options to hedge grain purchases and sales. Often, Xcan and
the grain companies it dealt with would take opposite sides on
transactions, which created a lot of trading.
But AU is now able to reduce its price risks within the company because
it controls the grain from the elevator to the customer.
“There could have been some inter-company transactions that aren’t
required any longer that may have resulted in lower volumes on the
trading floor,” said Brad Vannan, AU’s managing director of
merchandising and transportation.
Until a normal-sized crop comes along, it will be hard to tell how much
change there has been.
“We absolutely need the commodity exchange and the service it
provides,” Vannan said.
“Is our participation down there as much as it was between the three
heritage companies (that merged to form AU)? Probably not …, but it’s
really going to be difficult to determine what (effect) this merger has
had on the commodity exchange until we get to have a crop the size that
existed pre-merger.”
Tryhuk said he thinks overall grain industry consolidation has shrunk
the stable of companies that trade WCE futures and options.
“There are simply fewer players left in Winnipeg.”
However, Peters said there is still room for growth in the number of
users of WCE contracts.
For canola, the exchange hopes to make its contracts more attractive to
American, Australian and possibly European users.
Few farmers are actively involved in trading feed grains, which the WCE
wants to change.
Peters said the dire state of many of the contracts doesn’t look good,
but it reflects the state of Prairie grain production.
