WINNIPEG – Prairie farmers are seeding almost as many acres of peas as flax. And now, like flax, they’ll be able to hedge their risk on the Winnipeg Commodity Exchange.
Last week, the exchange launched the world’s first feed pea futures contract. The price reference for the contract is cost, insurance and freight (c.i.f.) based on delivery at one of four northern European ports. The contract is traded in U.S. dollars.
Fred Siemens, president of the exchange, said growers are certainly sophisticated enough to use the c.i.f. contract, but he predicted farmers will take a wait-and-see approach to the contract.
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“The way that it’s trading, the design of the contract, I don’t anticipate a lot of farmer participation in the early stages,” Siemens said. “In fact, the less commercial you are, the less likely you are to participate in the very early stages.”
Siemens added as growers and farmers who use peas for feed start to see how the futures prices relate to the cash market, more may start to use it for hedging. He said the contract will help provide some transparency in the market.
Guarantee minimum price
“Where a farmer will truly benefit is when we’re able to list an options contract,” Siemens said. Farmers could use options contracts, agreements that allow contract holders to buy or sell at specified prices within specified time periods, for minimum price guarantees.
Options are not yet available, but Siemens said when the exchange is confident the futures contract is working well, it will add them.
The success of the contract will be judged by whether it adds value for the farmer, Siemens said. He added farmers should be able to “go to wherever they sell their peas and say, ‘All right, this is the price at the Winnipeg Commodity Exchange. Now, let’s talk.’ “
Liquidity, a reasonable relationship between the cash price and futures prices, reasonable convergence in delivery months, and international use of the contract will also serve as benchmarks of the new contract’s success, Siemens said.
The exchange first started considering a feed pea futures contract in 1988. Earlier this year, Siemens said it seriously considered developing a contract free on board (f.o.b.) Thunder Bay.
But the c.i.f. proposal appealed more to members because prices are based on delivery in Europe, which is the main market for Canadian peas.
This is the first c.i.f. contract for the exchange, and is also the only contract traded in U.S. dollars.
Siemens said the contract has attracted attention from the pea trade in Europe and Australia. In fact, the exchange is holding back the December 1996 contract from trading to see if it can change the origin specification.
Australian exporters would like the origin to be optional so they can use it as a hedge. Currently, the contract specifies North American peas shipped from a Canadian port.
While exporters would not want physical delivery on the contract, the threat always exists and they would not want to assume the risk of trying to find North American peas to ship to their buyers.
