The Winnipeg Commodity Exchange is going to tell the flax industry that
if it doesn’t use the exchange’s flax contract, it will disappear.
“If the trade is going to want that contract to exist, they’re going to
have to find ways to make it active,” said WCE economist Lyndon Peters.
“At the end of the day, if we don’t see a level of volume in that
contract that justifies its existence, we’ll consider delisting it ….
We’re a business, and if a product doesn’t justify its existence, it
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doesn’t stay out there.”
But getting the industry to use the contract won’t be easy. Some users
think the contract’s design is a major problem. Others say the world
market has changed.
“Some crops just evolve,” said Brad Vannan, managing director of
merchandising and transportation for Agricore United.
“There have been a lot of changes in the world flax market.”
Flax trade at the WCE slumped almost 70 percent in September and
October this year, compared to the same period in 2001. There is so
little trade now that some won’t use it.
“It’s way below my threshold as a trader to even want to attempt a
position,” said Ken Ball of Benson Quinn GMS.
“If a customer insists, I will enter orders in it, but I don’t like to.”
Vannan said some of the drop in trade could be attributed to the
Agricore-United Grain Growers merger, in which Xcan Grain was also
brought fully inside the company. The three companies no longer have to
trade against each other.
But Vannan said the big changes are due to other forces in the world
flax market. Japanese demand has shrunk as users there find alternate
oils.
In the United States, farm bill subsidies have encouraged a bigger big
crop and reduced
demand for Canadian flax.
If American grain handlers and users don’t use the WCE flax contract, a
substantial part of the market demand is now operating outside it,
Vannan said.
The only large buyers are European and they aren’t interested in flax
futures. They like to buy from suppliers at a fixed price rather than
at a floating price hedged with futures contracts.
“If we are buying from the farmer and always selling futures, then who
do we buy back futures from?” asked Vannan.
Lawrence Yakielashek of Toepfer Canada said many Canadian grain
companies are also beginning to offer flat-price flax out of European
ports, rather than offering it from an elevator or Thunder Bay
position. That cuts the need for futures for the grain company, trading
companies and buyers.
Yakielashek said the present flax contract, which specifies prairie
elevator delivery points, doesn’t work for exporters like his company,
which preferred a Thunder Bay terminal point.
Added Vannan: “The whole theory behind the futures market is that you
have a number of different players that are trying to discover price in
a broadly traded market and when the market narrows down … and you
have fewer and fewer people involved, I think futures tend to be
probably not the tool of choice.”
Ball hopes the contract can be saved so farmers can continue to see
what flax is trading for in the world market.
“When farmers go to a dealer to get a quote for prices, (they need) to
have a benchmark to see if that price they are being offered is
reasonable.”
