Planned western wheat, durum futures generating interest

The upcoming launch of wheat, durum and barley futures contracts on the ICE Futures Canada trading platform on Jan. 23 is reported to be generating interest from many potential participants.

The Canadian government passed legislation in December ending the Canadian Wheat Board’s longstanding single-desk marketing powers for western Canadian wheat, durum, and malting barley as of Aug. 1, 2012.

As the legislation moved forward over the latter half of 2011, Winnipeg-based ICE worked in conjunction with industry participants to develop futures contracts for use under the new open market.

ICE Futures Canada president Brad Vannan said the new futures have been generating "considerable interest" from many potential market participants including grain companies, commission houses, speculators, farmers, and international industry participants in Europe and the U.S.

The new contracts, he noted, are similar to the already successful canola contract offered by the exchange.

The durum futures in particular are seeing broad interest, which Vannan described as "very encouraging."

Canada supplies a little over 50 per cent of the global trade in durum, making it a very important supply region. "The participants understand very well that it’s important to have some kind of price-setting mechanism plus something they can hedge their needs in," he added.

A well functioning futures market is an important tool for pricing grain in advance, as it will eliminate some of the price risk and will allow the supply chain to operate much more efficiently, said Vannan.

While durum futures contracts were tried in Europe and the U.S. in the past, they were never successful. Vannan said one reason behind the failure of those previous durum contracts was the fact that the Canadian crop was tied up under the CWB.

With the single desk removed, he said, there will now be a greater need for a viable futures market.

Jerry Klassen, manager of the Winnipeg office for Swiss-based GAP SA Grains and Produits, said European durum buyers and other key players were showing a lot of interest in the launch of the futures market.

While the liquidity of the contract remains to be seen, "a lot of companies have an interest in seeing it work" and will be following the market closely, he said.

The timing of the launch will likely see the liquidity on the quiet side to start, but Klassen expected it would pick up through the seeding period and into the summer.

Currently there is no major price discovery tool for durum and the relative size of the market can lead to relatively thin activity, said Klassen, adding that a functioning futures market will benefit buyers and sellers by providing viable price signals on a daily basis, even when the market is on the thin side.

Liquidity

There are already U.S.-based wheat contracts in Chicago, Kansas City and Minneapolis, but Klassen was confident the new Canadian futures would also be successful. The Canadian wheat crop, he said, was large enough to bring in both commercial and speculative interest to the futures market.

Klassen expected the liquidity of the new wheat futures would eventually be augmented by spreading against the durum futures and also by spreading against the U.S. wheat contracts.

Ron Frost, of Frost Forecast Consulting in Calgary, said the viability of the new futures contracts will depend on whether or not enough interest is generated to provide a liquid market.

"We need to get it up and going and we need to get liquidity," said Frost, adding "that requires everybody sticking their toe in and putting a little into it."

From a Prairie farmer’s perspective, Frost said producers were not really thinking about the futures just yet, given the newness of the changes to the marketing reality.

However, he said, a viable, liquid market priced in Canadian dollars and using Canadian delivery points would definitely provide benefits for Prairie farmers over and above the closest alternative hedging options in the U.S.

Related story:

ICE plans new wheat, barley contracts for Oct. 2012 delivery, Oct. 20, 2011

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