In the last issue I wrote about the de-listing of the ICE milling wheat, durum and barley future and options contracts. These contracts were introduced in 2012, then de-listed on October 26, 2017. Now, let’s address three reasons why you should care.
Reason 1: The loss of these contracts gives you one less tool to use to determine fair market values for your grains, or to take advantage of price spikes in futures markets.
Reason 2: Futures contracts allow you to lock in prices that suit you, as opposed to letting a grain company make sales, set the basis, then determine what they will offer.
Reason 3: Trading futures allows you to secure a price on paper, with no need to set a basis or lock in a delivery contract until much later. This gives you time to find the best basis and/or grade for your grain once it’s in the bin.
The purpose of a futures contract is to establish a fair market price for a specific delivery period. For a futures contract to trade, you need willing buyers and sellers. If all you have are sellers and no buyers or vice versa, or only a limited number of either, it is hard for a futures contract to function properly. This leads to fewer participants using the contract, until eventually no trades can be made and the contract closes.
Canola futures trading on the ICE contract has grown steadily over the years, but initial uptake and growth was slow when the contract was first introduced. All of the players involved were, no doubt, a little reluctant to use the futures at first, but over time volumes grew and the contract became a viable way for buyers and sellers to transact.
The growth and expansion of the canola crush industry in Western Canada over the past 25 years and the use of the futures contracts by canola crushers to hedge their purchases and sales was no doubt key to canola contracts remaining viably traded.
Use it or lose it
Were you using these wheat, durum and barley contracts? What about durum growers? With the durum futures contract you finally had a way to lock in prices on a commodity that has always been a sale-by-sale cash-traded grain, where all of the pricing decisions were in the hands of buyers and grain companies.
Spring wheat and barley producers still have the Chicago and Minneapolis futures but for durum producers, the ICE contract was the only futures contract in North America. Now that it is gone the chance that it will ever be brought back is likely slim to none.
I hope these contracts didn’t fail because there wasn’t enough interest from sellers (farmers). If that is the main reason these contracts closed, farmers have only yourselves to blame for losing this tool.
Grain marketing has gone digital. New marketing companies are offering online services where buyers and sellers can negotiate prices that are posted publically, creating transparent market pricing systems that anyone can use. This is a good step forward, as it gives producers and buyers a way to transact business directly.
These sites give producers a place to see actual selling prices for specific grains. This can help them maximize sales, either on one of these sites or to a feeder, mill, crusher or grain company. These sites bring transparency to local cash markets, but they don’t give farmers an opportunity to take advantage of futures rallies like futures or options contracts do.
Another change that could provide competitive marketing solutions would be for more Prairie grain companies, crushers and millers to offer you the ability to lock in futures and/or basis-only deferred delivery contracts at any time of year. A few companies do offer these contract options; find out which ones they are and what types of contracts they offer so you’re prepared to use them when the time is right.
There is no reason all grain companies shouldn’t be able to offer you this kind of contract option. When you’re talking to your grain buyer, ask if they offer these kinds of contracts. If the answer is no, ask why. Tell them you need pricing flexibility for your farm, and if they want to buy grain from you they need to offer you these kinds of contracts.
Separating the timing of pricing the futures and basis on your grain contracts let you decide when to price your grain and for how much.