(Commodity News Service Canada) — Open interest in western barley futures has declined to virtually zero, which would normally signal that the end of the contract’s long and distinguished history is close at hand.
However, officials from the Winnipeg-based exchange ICE Futures Canada are not ready to give up on the contract quite yet and are working on ways to bring life back into the commodity.
Open interest in all western barley contracts declined to zero in the first week of the month when participants liquidated the remaining positions in the nearby December contract. There has since been some minor interest in the nearby March future, with open interest currently sitting at two contracts.
“No open interest in the commodity generally means that the contract has failed as a price discovery instrument,” said Ron Frost, an analyst with Frost Forecast Consulting.
However, Frost acknowledged that the contract requires participation from the industry and without that interest the commodity is destined to fail.
Some market participants blamed the demise of the western barley future on all the changes made to the structure of the contract through the past decades.
“My feeling on the barley future is that it worked good when the contract was based off of Thunder Bay, but through the exchange’s fiddling with the specifications through the years, the future has become totally irrelevant,” said Bill Craddock, a southern Manitoba producer and online commodity trader.
Frost felt the barley industry began to lose confidence in the contract “quite some time ago,” but especially when open interest in the barley future dropped below 10,000 contracts.
“With open interest currently sitting at around two contracts, the future is virtually unusable as a viable pricing mechanism,” he said.
Craddock noted that instead of using the futures market, barley producers now rely totally on the domestic cash market and in some cases look to the Canadian Wheat Board’s pool return outlook (PRO) predictions to get a feel of where values should be.
“However, I would say that this is not a strong market signal,” Craddock said.
Craddock said the loss of the barley future as a viable pricing tool is a sad situation and can also be linked to a number of factors other than the structure of the contract.
The large amount of distillers grain making its way from the U.S. ethanol sector into the western Canadian feed industry has eliminated the need of end-users to use the barley futures market, Craddock said.
The four billion bushels of corn used by the U.S. ethanol sector translate into 1.3 billion bushels in corn equivalent coming out as distillers grain.
The CWB’s control of western Canadian producers’ barley in the global export market was also a factor behind the diminished usage of the barley futures market, brokers said.
ICE still hopeful
“The western barley future did go through an essential structuring about a year ago, and at that time the goal was to make the contract more closely resemble the domestic market,” ICE Futures Canada CEO Brad Vannan said.
Restructuring occurred as ICE Canada felt it unlikely that there were going to be any material changes to the way barley was traded in Canada, he said.
“We had at a point in time (when we) expected some changes to the way the CWB had control over the barley contract,” Vannan said. “But after waiting for those changes to occur, ICE Canada had to move on and end the waiting and which point the exchange decided to restructure the contract to fit the market that we had.”
Vannan also explained that at the same time the changes were being made to the barley contract, there were also big changes in the trends of Canada’s livestock sector.
“There was a big surplus of barley around all of a sudden, the cash market also had very little volatility, which unfortunately resulted in very little need to hedge as there was very little price risk,” Vannan said.
He agreed that the influx of dried distillers grains coming into Western Canada has also changed the complexity of the market.
“There has certainly been a number of circumstances that were beyond ours and the trade’s control, which put a damper on the usefulness of the contract,” Vannan said.
ICE Canada plans to be patient with the contract and hopes the trade will continue to support the commodity, he said.
“And while there is very little open interest at present, there are still bids and offers coming forward in the contract,” he said, noting that there continues to be some minor ebb and flow, particularly in the front months.
“The fact that open interest is almost sitting at zero is something I am not pleased with, but I am not overly concerned with it either,” Vannan said, adding that ICE is still very supportive of the contract and is willing to stay with it, if the trade is also willing to stick with it.
The future’s restructuring through the years, he said, was to broaden out the contract to make it more accessible to a wider range of participants, including feedlots, the smaller grain companies, and even producers. The financial criteria were also lowered to allow individuals to deliver against the contract or take delivery of it.
By lowering the financial criteria, he said, the risk to other participants was not increased. “We just put reasonable limits on the contracts to what people could do,” Vannan said.
All the restructuring to the barley future has also been supported by the grain industry, which could have easily rejected the changes, Vannan said.
“But they didn’t… they were very supportive of the contract being accessible to a broad community which would allow a much larger range of participants to use the contract as a risk management tool,” he said.
But the bad news is that the contract has failed to be a must-use tool for the feed grain and livestock industries, he said.
Vannan said ICE Canada knows there are some disconnects between users and the barley contract which will need to be addressed.
“We have already started the process of again consulting the marketplace to see if there are any further suggestions to improve the contract or to find out if the domestic contract is something that is needed in its current structure,” he said.
ICE Canada was also looking at putting the commodity out in a different form, he said.
“The exchange can put out a variety of over-the-counter contracts, so there are a number of other options we can explore to offer the western Canadian barley market that may be more appropriate,” Vannan said.