Growers and traders are greeting a new flax futures contract with a healthy dose of skepticism.
In an attempt to revive trade in flax, which has been stagnant since spring 2003, the Winnipeg Commodity Exchange has approved changes to the flax contract that make it resemble the canola contract.
“In redesigning this contract it was felt that we would go to a model that has already proven successful,” said exchange senior vice-president Will Hill.
The two main changes are that it will be traded in Canadian dollars instead of U.S. dollars, and Thunder Bay has been removed as a delivery point.
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Hill expects the Manitoba Securities Commission will rubber stamp the new document and within the next few weeks there will be a new October or December contract on the board.
He feels conditions are favourable for launching a new flax futures contract. Prior to the frost and wet weather, prairie farmers were expected to harvest 920,000 tonnes of flax, up 22 percent from last year.
“With a larger crop and prices being a bit more volatile here coming through the weather, I think there’s some opportunity. We’re optimistic that we’ll see some trade in it, but as with all contracts, the market will decide whether they wish to use it or not.”
Judging by initial reactions, the market doesn’t share Hill’s optimism.
Barry Hall, Flax Council of Canada president, said there’s no question there’s a need for a futures contract, but he wonders if it can be resuscitated after such a long dormancy.
“I don’t want to be pessimistic but once a contract has lost that critical mass it’s difficult to get it started again.”
Alan Day, a trader with Union Securities Ltd.in Saskatoon, doubts whether it can be revived. He said the exchange has basically gone back to the contract that was in place before the last significant changes were made in December 2003.
It’s a hard contract for farmers to deliver against because the specifications are complex.
Day doesn’t expect traders to use the new contract until the exchange unveils its electronic trading platform on Dec. 13.
“I would be kind of surprised if we saw any real interest in this contract develop much before that switchover.”
Chris Hale, director of the Saskatchewan Flax Development Commission, is happy the exchange is attempting to revive the contract because it has proven useful in the past. But he worries time may have passed it by.
With the consolidation of the grain industry, there are only about four or five large bulk flax buyers operating in Western Canada, so finding a price isn’t too complicated.
Producers can also discover the price by contacting food flax buyers, by using the internet to find the track price in Thunder Bay or by listening to radio stations that broadcast street prices for a variety of commodities.
“We used to all look to the Winnipeg Commodity Exchange for price discovery once upon a time, as recently as three or four or five years ago. Not any more. You get your finger on the pulse a little bit and have an idea what the price is,” said the farmer from Rouleau, Sask.
With current crop conditions driving up new-crop prices, producers may consider using the contract to hedge a good value for their 2005 flax crop, Hale said.
Using it as a speculative device, however, could prove disastrous if liquidity again becomes a problem. Getting people to use the contract again will be akin to trying to change their eating habits, said Hale.
“It’s a tough thing to do.”
Hill said the exchange has done everything it can to create a functional contract.
“If people decide that they’d rather trade flax as a specialty crop than as a hedgible commodity, then the contract will not be successful.”
He would like to see trade volumes reach at least 1,000 contracts a day. The flax contract will be reviewed within a year. If it is not being used it will be de-listed, despite the fact it will be cheap to operate on the electronic platform.
“Nobody wants to have a contract listed that goes on forever and ever without any trade at all,” said Hill.
