ICE barley futures contracts

ICE Futures Canada’s president is confident barley buyers and sellers will benefit from new contracts

Something that has been around for over 100 years can hardly be called new, however, the ICE Futures Canada barley contract might be seen that way. Since the first barley contact was established on what was originally the Winnipeg Grain Exchange, it has seen several changes to reflect prevailing market conditions, domestic legislation and global issues. Several iterations later, through world wars, continental barley markets and, most recently, the removal of the Canadian Wheat Board’s (CWB) monopoly powers over barley marketing, the barley futures contract still survives, but in a new and improved version.

“The current barley futures contract is based on our very successful canola contract,” says Brad Vannan, president and chief operating officer of ICE Futures Canada. “The canola contract functions very well and has grown rapidly over the last six years and to base the changes needed on a successful contract just made sense because both crops utilize the same storage and transportation infrastructure.”

The new barley futures contract was created to meet the potential markets needs within the prevailing conditions in Western Canada. “Among the biggest changes in this new contract is a move away from a pricing point in southern Alberta to a supply point in central Saskatchewan, which expands the contracts’ potential utility across a broader demand base, including export markets,” explains Vannan. “But that change, and others, will not necessarily make the contract successful. The market requires a depth of product and breadth of participation to function, not just a contract. We — ICE and other invested parties — are working to engage different stakeholders with specific needs to participate at the same time to create an active and transparent marketplace over time.”

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According to Aaron Anderson, assistant vice-president of merchandising at Richardson International and a member of the team that developed the contract, the new contract is a good hedging mechanism for both feeders and growers alike. “This is not a new contract per se,” explains Anderson. “It’s been in existence now for over two years in this new form. However, it is going to take time for users to migrate back to using futures from what has been, essentially, a cash market.”

Anderson expects that the barley contract, a clone of the canola contract, will find a user base as both buyers and sellers look to gain price security in the feed barley market. “Risk management is the key to successful trading,” he says. “And for players like Richardson and others, as well as the sellers of barley, a functioning, active barley hedging mechanism like this barley future contract is needed.”

Risk management

There are other ways to manage risk, but none are as efficient as the futures markets. “Risk adds cost,” says Vannan. “Farmers would experience this cost of risk in lower priced bids. Competitive markets like corn, soybeans, cotton and canola have evolved to be the most profitable crops to grow partly because using a futures market reduces the cost of risk. It’s efficient and it allows merchants to hedge and therefore safely enter into forward contracts that may not be executed upon for months. Price exposure over time is extremely risky especially in a competitive global market where prices are volatile. The added advantage is that with purchase and sales agreements firmly in place well in advance of contract execution, transportation and other logistics considerations can be planned well in advance which should result in more efficient use of potentially scarce resources. Sometimes in non-hedgeable markets, by the time buyers and sellers can agree on a price, all the logistics resources have already been spoken for and the contract can’t be executed.”

Although the CWB monopoly has been gone now for two full crop years, going into the third, the underlying environment still in flux. “Additionally, the grain trade is still consolidating ownership in Western Canada,” says Vannan. “Add to that the fact the livestock trade is shrinking and barley acres are declining and you can see the challenges the new barley futures contract faces.”

Farmers should expect slow, steady growth in the barley futures contract. “This is the first chapter of a long book,” says Vannan. “The futures market is arguably the most efficient market structure there is. It’s brilliant in the way it responds to and disseminates the flow of information, transfers risk and enables price discovery.”

Current lower prices may create more offshore demand for barley, which could lead to a broadening and deepening of demand. That will, in turn, create more competition and a need for price discovery and risk management.

“Futures markets do not create cash markets,” explains Vannan. “It’s the other way around, and our cash market, internationally, is very young. Only two years old. Add to that all the focus on the wheat market and logistics, and you can see that feed barley has been a little passed over to this point. And it may continue that way for some time. When those participants who realize their risk and have a desire to mitigate that risk efficiently in a futures market step up and start to use the contract, then there will be a market. We’ve designed an efficient contract with input from all the stakeholders. In some ways, many ways, it’s like leading a horse to water. Now, it’s up to that horse to decide if it’s thirsty or not.”

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