We may very well be on the verge of The Quickening for hard red spring wheat futures.
Some think There Can Be Only One when it comes to the the question of how many futures contracts will be used by Canadian prairie farmers to hedge their hard red spring wheat.
I think that it is most likely that there will be only one intact and alive six months from now, so as the new crop year’s orange and pink pre-dawn glow is replaced by the burning eye of the sun on August 1, we’re likely to see one wheat futures contract arise and swell with new strength, another lie dead and bleeding at its feet, and a third hanging around – a little ways off so it doesn’t face the beheading blade.
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The likely winner is the Minneapolis Grain Exchange and its hard red spring wheat futures contract, which has been around for more than a century. The likely dead one is Winnipeg’s ICE Futures Canada contract, which launched this year. And the one hanging around at the edge of the forest is Chicago’s CBOT SRW contract.
The MGEX contract has lots of liquidity, is the only existing HRSW contract in North America so most traders are comfortable using it, and it has already adapted itself for the coming CWB-less market. The ICE contract has almost no liquidity and hasn’t caught on over the winter, but is custom-designed for the Western Canadian commercial environment. The CBOT contract isn’t reflective of HRSW specs or its particular market realities, but it has incredible liquidity and that’s a key consideration for certain hedges and hedgers.
It’s too early to write off the Winnipeg contract. There still is no nearby month in traditional terms, so much of the normal uses of a futures contract don’t yet apply to it. The main use it can have now, with only new crop months available, is commercial hedging for new crop purchases and sales. Since most grain companies have been extremely leery of making new crop purchases from farmers without an existing new crop sale, there hasn’t been much use for futures yet. Much of the existing commercial business is self-hedged by matching purchases and sales, so even likely commercial users haven’t seen much need to use futures yet – either MGEX or ICE – for new crop Canadian HRSW.
That will likely change greatly as soon as the new crop’s quality and protein levels become clear, when competitors’ crops are assessed, and when the new crop year’s demand becomes more obvious. So there’s time for ICE to catch on, and it has not yet been vanquished.
But the question I wonder about, and which I bounced off MGEX officials I met with yesterday, is whether or not there can be only one dedicated hard red spring wheat contract operating in North America. There are already three wheat contracts, for soft red winter in Chicago, hard red winter in Kansas City and HRSW in Minneapolis. Can the market bear another in Winnipeg?
To me, it all depends on whether the prairie Canadian crop and market is different enough from the U.S. HRSW market to justify two different contracts for two different commercial systems, and for traders to spread trade between the two HRSW markets and the other types of wheat. In many ways, the U.S. and Canadian HRSW markets are extremely similar, with similar uses for the grain, with many of the same companies moving the stuff, with the crops grown in similar, adjoining regions and producing about the same crop.
But they’re also quite different, with different railway lines, some different grain companies, different ports and a much different domestic/export spread. For instance, the Canadian crop is overwhelmingly exported, while the U.S. crop is about half-offshore export and half-domestic. So the question is: are those differences enough to justify two separate contracts?
The MGEX officials were very gracious and polite in not declaring the ICE contract already-dead or claiming that it definitely had no place in the future of HRSW hedging in North America. They argued strongly that their contract is the best and will win the vast majority of the Canadian crop’s hedging needs and speculation built atop that, but they held back from seeming to shovel earth upon the possible future coffin of the ICE contract. The head of the CBOT’s agricultural derivatives was similarly gracious a few months ago when I asked him about the likelihood of the ICE contract succeeding. The market will decide that, he told me.
And that’s the truth. We’re still batting around a bunch of issues that come with the dawning of the post-CWB prairie grain world, but when the new commercial environment arises, all these questions will be answered, likely in a very short period of time. That’s what Scott Irwin of the University of Illinois told me: these things tend to get sorted out fast, and the losers end up dead rather than lingering-on as second-bests.
So we’re likely to see a rather harsh and dramatic sorting out of these questions a couple of months from now, and likely there will be only one. But who knows, sometimes an unlikely underdog can survive duels you’d never give them a chance in, and the ICE may find its place alongside the MGEX and the other wheat contracts in the new world.
Regardless, it’ll be an interesting fight to watch, and kudos to all the marketplaces for being willing to fight it out and not just assume the big MGEX contract will win. What’s wrong with a good fight? That’s what marketplaces are all about: honest competition. And Who Wants to Live Forever anyway?
(The image above is a screen capture of an image from Highlander, a movie I once watched often when I lived in a cabin and had few videotapes, starring French-sounding Christopher Lambert as a Scotsman, Scottish-sounding Sean Connery as a Spanish swordsman, and a scary Russian-sounding dude who was probably actually from Iowa, where I’m heading right now for the annual World Pork Quickening. I’ve referred to this movie before when discussing this inter-exchange battle, apparently because I can’t get cheesy movies out of my head, and can’t stop relating them to serious things.)
