Winnipeg exchange to try new way to contract peas

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Published: October 24, 2002

Hope and skepticism are greeting the Winnipeg Commodity Exchange’s

decision to develop an edible peas futures contract to replace the

failed field peas contract.

A new contract will have to be well designed and able to sway an

industry comfortable with cash markets.

“We would use it,” said Anthony Kulbacki of Blue Hills Processors Ltd.

in Avonlea, Sask.

“There’s no effective hedging mechanism right now.”

Kulbacki, whose company is building a pulse processing plant, said a

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simple hedging device such as a futures contract would help the

industry grow by reducing the risk faced by farmers, processors and

buyers.

Scott Cunningham, president of the Canadian Special Crops Association,

agreed.

“I think everyone in the industry would be very interested in any new

hedging or risk management tool,” Cunningham said.

If a viable peas contract could be established, it might open the door

to futures contracts in other special crops, such as lentils and

canaryseed.

But Brian Clancey of Stat Market Research said the exchange’s three

failed attempts at building a pea contract do not augur well for

another revision.

“Clearly the people in this industry haven’t wanted it and haven’t

needed it,” said Clancey.

“Without the participation of the industry and farmers, you’re just not

going to have the liquidity that’s going to attract the speculative

interest that’s going to allow this thing to go.”

The exchange delisted its stagnant field peas contract Oct. 15, but has

already begun looking into whether a contract focused on human

consumption peas would work better than the former contract, which was

based on peas for livestock feed.

“The conversations with the industry have already begun,” said exchange

economist Lyndon Peters.

The field pea contract was introduced in November 1995, when prairie

production of field peas was rapidly expanding. The biggest buyers were

European, so it was designed to hedge feed peas produced outside of

Europe but delivered to European ports.

Some companies used the contract, but others began using it in an

unintended way to force pea deliveries, Clancey said. But speculators,

who add necessary liquidity to any contract, avoided the contract

because they didn’t want to be forced to deliver a commodity.

The contract was redesigned twice to make it more usable, but volume

sputtered and died.

The field pea contract wasn’t restricted to feed peas, but Clancey said

edible pea marketers did not use it, so it became a feed pea contract.

Feed pea production collapsed on the Prairies as drought struck some of

the biggest production areas in 2001 and 2002 and that skewed the

industry toward edible peas.

Peters said the exchange talked with the Canadian special crops

industry, and most players were more interested in an edible pea

contract rather than a feed pea contract, since that’s where most

companies and producers have turned their attention.

“The edible pea market has been the driving force behind the industry,”

Peters said.

But Clancey thinks the pea industry may swing back toward feed

production as western prairie acreage recovers from drought, especially

if anything affects demand from India for edible peas.

“The reason we think edible peas are so hot is that India is buying so

much,” said Clancey.

“But Indian demand cannot be guaranteed.”

India is encouraging domestic production, and nearby countries such as

China and Burma are ramping up production to try to take Canada’s

place.

Europeans may also figure out that edible peas pay premiums and begin

pursuing the Indian market, Clancey said. Europe harvests earlier than

Canada and would be able to fill early markets.

Clancey said he believes India will continue to be a market, but its

demand won’t be enough to make prairie peas a primarily human food.

“Within two years we could be back to having feed peas a 1.5 million

tonne industry and India could go back to being a sporadic buyer,” said

Clancey.

Another challenge for an edible pea contract is the special crops

industry’s well developed cash contracting system, which operates as a

form of hedging. Special crops marketers are familiar with forward

contracts between growers, processors and end users.

They won’t use a futures contract if it doesn’t offer much more

security than the present system.

“You have to convince them that what you are doing is adding value,”

said Clancey.

Peters said members of the Canadian special crops industry have told

the exchange they want to have futures contracts to manage their risk.

Their chance to prove all parts of the industry want it will come in

the next few months, as the exchange attempts to finally make peas work

in a futures contract.

About the author

Ed White

Ed White

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