WINNIPEG – The pork industry needs a Canadian hog futures contract at the Winnipeg Commodity Exchange, according to a report by Sparks Companies Inc.
The U.S.-based futures experts talked to industry players in Montreal, Toronto, Winnipeg and Edmonton during the summer. The exchange hired the company to see whether it should look at developing a futures contract.
“We had some very good dynamic discussion about what the industry needs and we came up with a positive result on the needs assessment,” said Stan Casar, director of trading and markets at the exchange.
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Goal is to lower risk
The industry now bases its prices on futures contracts at the Chicago Mercantile Exchange. Casar said participants want to reduce their basis risk with a Canadian contract.
Basis is the difference between the cash and futures price, and includes all costs associated with owning and moving the hogs from the actual delivery point to the futures delivery point.
Casar noted a Canadian contract would be traded in Canadian dollars. Industry participants would no longer have to hedge against currency fluctuations, reducing their risk and their transaction costs.
A domestic contract would also reflect the “superior genetics and quality” of Canadian hogs, Casar said.
Sparks and the exchange will complete a feasibility study over the next two months to estimate costs and benefits of a contract, and how many players would use it.
Casar said Sparks will also look at the need for a hog index, which would establish Canadian cash prices.
Several interested parties
He would not reveal which industry players are most enthusiastic about the potential contract, but Sparks talked to producers, marketing agencies, processors, retailers and governments.
The general manager of Manitoba Pork, who met with Sparks in Winnipeg, said he was a bit surprised to hear the results.
“We didn’t detect an overwhelming opinion or consensus, at least in the session we attended, toward the need, based on the fact that all hogs are priced on a North American basis anyway,” said Larry Sedgwick.
Manitoba Pork would assess a Winnipeg contract to see if it could use it, Sedgwick said. But the marketing agency would need more information.
Sedgwick explained Canadian hogs are priced off the Chicago market. He said he doesn’t yet see how the exchange would establish a Canadian price reference point, and how a Winnipeg contract would reduce basis risk.
“Exchange is a factor, but given the fact that there is only a North American price, it has to be accommodated in that somewhere, whether it’s done on a hedge or done on the cash,” he said.
“Basis risk exists wherever you’re doing it; it’s how you manage it.”
Sedgwick also said the Chicago exchange is moving to a lean futures contract, which better reflects the quality of hogs produced in Canada.
