Will Winnipeg end up having futures contracts for Canadian spring wheat, durum and barley?
Life after the Canadian Wheat Board’s monopolies will be a lot easier if thriving new futures contracts arise before the beginning of the 2012-13 crop year, when the board loses its monopolies and farmers will need to think a lot more about how to hedge spring wheat, durum and malting barley. If there aren’t futures contracts to supply a public price for the base, underlying commodities, farmers will have to do a lot more work and and be stuck relying on buyers to tell them what they think a fair price is.
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Unfortunately, setting up new futures contracts is a daunting challenge, so ICE Futures Canada, which owns the Winnipeg commodity exchange, has quite a job cut out for it. It has about a year to get new futures contracts for the 2012-13 year up and running and get people using them. If it doesn’t, it’ll have a much tougher time setting them up in the future and probably wouldn’t succeed.
I’ve been talking to lots of of people about this topic in the past few days, and everyone seems to agree that the exchange will have a real challenge to surmount to succeed at making workable contracts, but that for all three commodities a well-designed contract could work.
Spring wheat might look like the least likely to succeed, because North America already has three thriving wheat contracts, but what I hear is that a contract that is specific to the main Canadian Hard Red Spring Wheat supplies and different enough to Minneapolis Grain Exchange spring wheat might be able to find users who would see it as a better hedging mechanism than MGEX spring wheat, and if delivery points were better suited for Canadian commercial needs – such as a better connection to the west coast export system – users of export Canadian wheat might decide to use it.
Durum’s a tiny crop in terms of world trade, but Canada dominates the export market, so users around the world might choose to use the Canadian contract as the the planet’s main hedging mechanism for world durum, much as world markets including Brazil use Chicago soybean futures as the world price discovery and hedging mechanism for world soybean prices. The big speculators and funds would stay away from it, because the volume would be just too low, but a thriving commercial use of the contract could inspire small specs to use it, and that can become a virtuous cycle.
Barley had a booming market of commercial buyers and sellers – including many farmers – until a few years ago when some of the big grain companies appeared to walk away from it after vertically integrating. But barley production has been chopped up between domestic feed barley, which is openly traded, malting barley, which was covered by the wheat board, and export feed barley, which was also under the CWB mandate. Bringing all three together might provide many more users of a contract, even though it will have only one specification. Malting barley users have shown an interest in using a barley futures contract, the exchange told me, because their prices are sometimes based on a rough spread to feed prices. A futures contract prices would make that easier to pin down for both sides.
Everyone tells me most new futures contracts fail, and many old ones have been lost. But from what I hear around the grain industry, there are real reasons to think well-designed futures contracts could work. So let’s talk to the exchange and tell them what each of us, in our different roles in the market, needs. If it fails, farmers lose.
