By this time next year, grain buyers and sellers could be doing business through a new agricultural commodity clearinghouse attached to one of Canada’s three major trading exchanges.
“I’d guess right now it’s about 80-20 it goes ahead,” said Russ Crawford, a Calgary based consultant working on the project for the Western Barley Growers Association.
The clearinghouse is designed to be an independent, privately run, risk management system that can deal with some of the issues facing the Canadian Grain Commission’s licensing and bonding system.
Read Also
Ag in Motion speaker highlights need for biosecurity on cattle operations
Ag in Motion highlights need for biosecurity on cattle farms. Government of Saskatchewan provides checklist on what you can do to make your cattle operation more biosecure.
That system requires a company to put up a large security bond, which may or may not cover its total liabilities at any time.
A number of dealer bankruptcies in recent years have seen farmers receive as little as 28 cents on the dollar.
The clearinghouse would use money put up as margin by individual buyers and sellers (perhaps 10 to 15 percent of the value of a contract) to guarantee performance on a transaction-by-transaction basis.
“It assures payment and it assures delivery, so there is a benefit for both sides,” said Crawford, adding the system is essentially foolproof because the clearinghouse will cover any default through the margin money on each contract.
At the same time, he emphasized the proposal is not intended to replace the existing CGC system.
There are certain circumstances in which bonding would be preferable and others in which the clearinghouse is a better alternative, especially for newer and smaller grain companies, dealers or processors and their customers.
Reg Gosselin, manager of corporate services for the CGC, said the clearinghouse proposal is promising, but added the agency needs to see something more concrete before it would accept it as a substitute for security.
“We would have to be satisfied that a transaction through the clearinghouse and the protections it affords are at least as good protection as a letter of credit or bond we’d hold from a licensee.”
Gosselin said the commission is willing to work with the proponents and if possible accommodate the requirements of the clearinghouse by possibly waiving security requirements in certain situations.
“We’re keeping an open mind,” he said.
While the commission wouldn’t have the regulatory authority to stop the clearinghouse from being set up, the commission could continue to require bonding for all licensed operators.
Besides risk management and contract assurance, the clearinghouse would also provide:
- Arbitration procedures.
- Standardized contract rules.
- Impartial conflict resolution.
- Application of up-to-date commodity valuation and margining for transactions.
- Continuous monitoring of risk exposure.
Modelled in part on the successful natural gas exchange in Calgary, the clearinghouse project is being developed with $1 million of federal government money through the Private Sector Risk Management Partnership program. The target start-up date is Aug. 1, 2007.
While the project is being spearheaded by the WBGA, the idea is to develop a system that can be applied to any agricultural commodity.
The federal funding was split into two phases. The first phase, to design a generic set of rules, procedures and agreements, has been completed.
The second phase now underway involves developing a detailed business plan, including finding a service provider, such as the Winnipeg, Toronto or Montreal trading exchanges and getting lending institutions involved.
WBGA director Albert Wagner said the CGC bonding system doesn’t always provide full protection, and can be a barrier to new companies trying to get into business.
“It requires large amounts of capital up front for bonding and that shuts the little guy out of the picture,” he said.
Proponents also say a clearinghouse would enable buyers and sellers who don’t know each other to do business with confidence.
Crawford said a recent series of meetings with farmer focus groups indicated that the two main concerns were cost and complexity.
With regard to cost, he said there is no definitive answer yet, although he added that any additional costs would likely be balanced off by financial benefits throughout the system. The total cost would be much less than mandatory bonding through the CGC.
As for complexity, he acknowledged that producers unfamiliar with exchanges may have trouble catching on to the idea right away.
The simplest analogy, he said, is to compare it with credit cards, where a buyer and a seller engage in a transaction even though they know nothing about each other, but with confidence that the transaction is backed up by a number of players behind the scenes.
Crawford added the clearinghouse proposal is “absolutely not” related to the government’s proposal to replace the Canadian Wheat Board’s single desk with an open market system.
“This tool would be a good and useful mechanism under a dual market or the single desk,” he said, adding the board itself could make use of the clearinghouse under either scenario.
