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GrainWorld: Which wheat futures are best?

The end of the Canadian Wheat Board’s single desk for marketing western Canadian wheat, due Aug. 1, is expected to create an increased need for a viable futures market to manage risk and aid in price discovery.

To that end, representatives of the Chicago Board of Trade (CBOT), Minneapolis Grain Exchange (MGEX) and ICE Futures Canada came to Winnipeg Tuesday to highlight the benefits of using their respective contracts in a panel discussion at the Wild Oats GrainWorld conference.

When it comes to the viability of a futures market for pricing a particular commodity, there is a trade-off between basis risk, the specificity of the contract compared to the crop being marketed, and liquidity, said Tim Andriesen, managing director with the CME Group, which operates the CBOT wheat market.

The soft wheat traded in Chicago is farthest away from Canada’s hard red spring (HRS) wheat from a basis standpoint and in terms of the specifics of the market. However, what the CBOT does offer the Canadian grain sector is liquidity.

The CBOT currently accounts for 74 per cent of the wheat futures volumes in the U.S. and 89 per cent of the options, said Andriesen, noting that liquidity allows for traders to get in and out of a market with ease and allows for a diversity of product.

MGEX spring wheat futures are more closely aligned to the HRS wheat marketed from Canada, although the volumes are considerably smaller than those at the CBOT.

While the outright volumes are smaller, Joe Victor, business development specialist with the MGEX, pointed out that over eight billion bushels of wheat were traded through the exchange in 2011 — well above the roughly one billion bushels of spring wheat grown between Canada and the U.S.

The correlation between the Canadian and the U.S. situation was strong when it came to spring wheat, Victor said, and added that durum could also be traded in relation to the Minneapolis futures.

Winnipeg-based ICE Futures Canada’s recently-introduced milling wheat contracts have only traded for a little over a month, and president Brad Vannan admitted that trade was thin "but not disappointing."

The first contracts available are for October 2012 delivery, and Vannan said the fact that minimal spot activity was going on in the cash market was limiting the futures volumes at this early stage.

He was confident liquidity would eventually pick up, and noted that a Canadian-based contract will be beneficial in minimizing basis and currency risks. Vannan also noted that while volumes are still thin in the ICE Futures Canada wheat contracts, the prices being quoted are said to be very accurate with the marketplace.

The three futures markets, plus the Kansas City wheat market, will all likely play a role to some extent depending on the conditions at any given time. Jerry Klassen, manager of the Winnipeg office of GAP Grains and chair of the session, commented that "if there are four functioning futures markets, it’s better than three."

Hedging and arbitrage between the four markets will be an important factor for the wheat trade going forward, he noted.

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