From talking to grain marketing folks recently, it’s become obvious to me that new crop wheat pricing – every winter – will use futures contracts rather than forward cash sales for price hedging.
Time and again this winter it’s become obvious that both grain companies and farmers are leery of the huge range of protein levels and quality spreads that appear in wheat and durum crops across the prairies naturally, and that has a huge impact on people’s willingness to lock themselves into delivering new crop grains. Other crops don’t have that huge range. Grain companies are willing to make modest sales agreements with end users and then turn to farmers to offer new crop contracts – but without a discount schedule attached. As a few farmers noted to me in the last couple of months, that dumps lots of risk on farmers, and the risk associated with sub-spec wheat can be bigger than the price risk laid off by signing the contract in the first place. If the discounts are 10 cents per bushel per percent of protein below specs, that’s one thing. If it’s 50 cents, it’s an entirely different matter. A 30 cent spread between 14 percent and 11 percent protein wheat is a lot less than a $1.50 spread, but in North Dakota, those are the types of spreads they’ve been dealing with in recent years. Actually, at times low protein and high protein wheat has been equally priced, so there’s been just no good way to guess what the spreads are going to be ahead of harvest.
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That’s entirely to be expected, most marketers agree, because grain companies are able to make one forward sale to a buyer for a certain type of wheat, but can’t make half a dozen other sales for all the various sorts of sub-spec stuff they might have to deal with. It’s just not possible. So the word I have heard time and again on both sides of the border is that few new crop forward grain contracts will ever lay out the discounts for farmers.
So that means farmers will generally only be able to hedge pre-harvest new crop values with futures contracts, and that’s what U.S. advisors have been recommending to their farmer-clients since that time Noah got drunk and embarrassed himself. This is music to my ears, because I love open, public markets like the futures markets, and once again – as they have done for more than a century – futures have proven themselves the best and safest way to openly and visibly discover true prices and transfer risk. That would seem to bode well for both the existing wheat futures contracts in Minneapolis, Kansas City and Chicago, and also for the new wheat, durum and barley contracts offered by Winnipeg’s ICE Futures Canada exchange.
But just because something’s needed doesn’t mean it must necessarily exist, and doesn’t mean it will naturally evolve and walk the earth. (This reminds me of the “necessary but not sufficient” stuff I studied in my Logic class way back in 1985 at Luther College at the University of Regina.) This is something opinion-fluffers of both left and right never seem to understand. Righties often seem to assume the fertile soil of the markets will always just naturally throw forth shoots to fill any void that needs filling. “Build it, and he will come,” is a pretty poor form of thinking, when compared to the historical record, methinks. Sure, you need the need for something to evolve, but that doesn’t cause it to evolve, and isn’t enough for it to survive. You can’t just assume the free market will automatically produce everything all the players need. That’s gotta be driven by the dynamism, ambition and technical savvy of the few individuals in the right position to do something, and they don’t necessarily have to do something if they’re distracted by something else, or can screw it up when they try. (This reminds me of another 1985 class I took at Luther: The Sociology of Religion, where I formed a lifelong attachment to the views of Max Weber, who saw culture as driving economic development and direction, rather than underlying material conditions. Mennonites and Hutterites are our local manifestation of his views.)
On the left there’s always that tendency to be cavalier about free market agents and institutions, to assume they’ll always be there, so you can have fun smacking away at them, knowing they’ll always be there to poke (and provide). I think of this as the poking-Daddy-in-the-eye form of leftyism. I, in fact, experience this every day with my 11 month-old baby, who takes great joy in poking me with her fingers when I’m feeding her. She knows very well that even if she succeeds in getting one of her razor-sharp nails into my nose or mouth while I’m bending towards her – something she’s getting better and better at – I’ll just keep shoveling food her way. It’s a pretty good situation to be in. For a baby. It still seemed to be the modus operandi for many of the privileged people that were in my sociology courses at the U of R, who were in their Marxist phase and were living on Daddy’s money but trying to outrage him, prior to taking comfortable bourgeois jobs and becoming The Man. But that attitude doesn’t work too well for an open economy or financial system, which is actually a frighteningly fragile thing. A casual harassment of fragile entities isn’t too helpful. Since they’re relatively free and fair and create a level playing field, lots of people with vested interests – including commercial interests – would love to subvert or corrupt them. Or just let them die.
This is a very fecund time for grain market pricing in Western Canada. It’s a field in spring time. Who knows what’s going to come up. Hopefully the ICE’s futures will germinate and grow strong, because it would be nice to see a prairie-based set of futures contracts. For farmers who want to know more about wheat market futures from the sort of people who actually run the contracts and create new ones, representatives of the ICE, the Minneapolis Exchange and Chicago’s CME Group will all be in Winnipeg for GrainWorld 2012, which is in less than two weeks.
We have a situation now where we will continually need robust, prairie-relevant grain futures markets, but that doesn’t mean they will be there. You are living through the year-long moment of truth in which it will become clear what kind of new beasts will evolve to fill that void, and with luck it will be the kind of beast you can control.
