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Finding the price in the new age

With delisted futures contracts, who’s responsible for price discovery?

Over the past five years there have been major changes to the Prairie grain marketing landscape that have — or should have — changed the way you market your grain.

The biggest change, and no doubt the catalyst for many of the changes since, was the removal of the monopoly marketing powers of the Canadian Wheat Board. When this happened, responsibility for marketing and selling all your grains fell on your shoulders.

Those who were comfortable with the pooled price system were no doubt a little uncomfortable. Those who wanted freedom to market and sell their grains where and when they wanted looked at this as a new start that would allow them to take control.

Not long after the CWB lost its monopoly the Intercontinental Commodity Exchange (ICE), formerly known as the Winnipeg Commodity Exchange (WCE), developed and opened up a couple of new wheat futures trading contracts for milling wheat and durum to go along with the Western barley futures and canola futures contracts that had been in place for quite a number of years.

I saw the addition of these wheat contracts as a great opportunity and a pricing mechanism that would help provide pricing transparency and price risk management for farmers.

So why, after just three years, has ICE decided to delist these contracts, along with the Western barley contracts, and take them off of the exchange? Because few people were trading these contracts!

Futures contracts little used

Why weren’t farmers and the grain trade using these contracts?

ICE created these futures contracts thinking that after the demise of the CWB the grain trade and farmers would be looking for a mechanism to help them with price discovery and transparency, to ensure they were selling and buying their wheat at a fair market value.

The CWB was created to market and sell all the wheat produced on the Prairies back in 1917, during the First World War. It was known then as the Board of Grain Supervisors, which after a couple years was renamed and turned into the Canadian Wheat Board. In 1943 the CWB was granted a legal monopoly to market all wheat, durum and barley grown in Western Canada and destined for human consumption or export markets.

Because they did this job for 95 years, I have heard many — including farmers — say that the CWB kept farmers from having to learn how to use futures contracts. When ICE came out with wheat futures contracts in 2014, farmers didn’t really know how to use them and instead turned to grain companies, letting them do the price discovery and price setting.

This sounds like a fox guarding the henhouse. Who’s going to get the better of that deal?

Back in the days of the CWB, grain companies were contracted to handle wheat and were paid handling and storage fees. The CWB made the sales and controlled the basis.

Included in the basis were the CWB’s operaing costs, with all net proceeds above that going into pool accounts to be paid to producers.

In today’s world, grain companies make the sales, control the basis, determine handling and cleaning fees*, and include a profit. The end result is the bid they will offer farmers.

The process hasn’t really changed, but those that are in control of the process have. I am fairly sure that the farmer is not the one benefitting the most from this change.

Being the seller, you really don’t want to leave the entire price discovery process to grain buyers.

Remember, grain companies’ business is handling and moving grain. Now that they are also in charge of making sales, do you think they’re going to sit back and hold out for the best possible price, or will they sell grain at the lower values, to ensure they can handle and move grain?

In the next article I’ll continue to explain how these and other factors have contributed to the failure of the ICE wheat and barley futures contracts.

 

*EDITOR’S NOTE: The original version of this story incorrectly stated that the government sets these rates. In fact, the Canadian Grain Commission does not set or approve these tariffs, and rate changes can occur any time during the year. We regret the error.

About the author

Columnist

Brian Wittal has 30 years of grain industry experience and currently offers market planning and marketing advice to farmers through his company Pro Com Marketing Ltd.

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