Feedlot alley supports the Winnipeg Commodity Exchange’s move to switch the barley contract’s focus from Lethbridge to the farmgate.
Feedlot operators believe the only way to increase the contract trade volume is to have it make more sense to farmers.
The recent version of the western barley contract was causing basis swings and driving off potential users to such a point that cattle feeders had trouble using it.
“I’d rather be able to go in and do a 100 lot bing-bang-boom than play for $2 or $3 and get 50 lots done,” said Steve Pain, the senior trader for Alberta’s Western Feedlots.
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“If (the new contract) attracts the attention and brings in the trade in general, that will enhance liquidity and that should make it a pretty decent trading instrument.”
The revised contract, which should be in place by Aug. 1, 2006, for the October 2007 futures contract, will no longer set Lethbridge as the delivery point and will not offer a set freight grid.
Instead, there will be a region of Saskatchewan set as par, with non-par pricing listed for other areas of Saskatchewan, Manitoba and Alberta. This will make it similar to the canola contract.
That’s something Pain, who was on the committee redesigning the barley contract, thinks bodes well for the new version. Users, both feeders and farmers, won’t see unrepresentative futures prices compensated for with weird basis levels.
“As an end user I would much rather work with a par contract that avoids all of the headaches in the way of freight and freight rates and freight allowances and basically go to the same system that canola works on,” said Pain.
“We know it works well and has been terribly well received on the Chicago platform.”
While the present contract should work better for today’s southern Alberta feedlot industry, Pain and the exchange believe it will be especially valuable if the Canadian Wheat Board’s barley export monopoly is broken.
If that happened, more barley would move through the open market, there would be more need for a hedging instrument like the western barley contract, and different end users would begin using it. For that to happen, the contract had to lose its exclusive focus on feedlot buyers.
“There were concessions made by the domestic end user in the hopes that it would attract the maltster and the barley exporter,” said Pain.
WCE vice-president Will Hill said dual marketing would require the contract to meet the needs of more users.
“The marketplace will become more relevant to more users,” said Hill.
“We need to arbitrage the export and domestic price. The best place is at the country level, the farm level, not at one particular end user level.”
At one time, canola was based on a Vancouver terminal delivery point, but once the domestic crushing industry became a significant user, delivery area was moved to the Prairies.
“What we’re finding is that the relevant price is at the farmgate today, because there isn’t a single point of demand for barley anymore,” said Hill.
Pain, who uses barley futures a lot, said he’d be happy to see the contract’s liquidity increase. The old design was meant for users like him, but in the end it wasn’t really working.
He and other feedlot operators are happy to see the contract turn its eyes to Saskatchewan if that means more prairie barley is hedged under the contract.
“There’s always give and take,” said Pain.
