Veteran trader says canola futures on the decline

While Western Canadian farmers are harvesting their biggest crop of canola ever, a veteran grain trader is warning the Winnipeg canola futures contract they rely on for price setting is in decline and could disappear.

“In the end all of the futures contracts (traded in Winnipeg) that have gone before have been delisted and there’s no reason that it (canola) isn’t going to be delisted as well,” says Brent Futz, who has traded futures on the ICE Futures Canada exchange and its predecessor, the Winnipeg Commodity Exchange, since 1983.

According to Futz, the canola futures contract, created in 1963, is in decline because there are fewer grain elevator companies in Western Canada.

“There comes a point where you just can’t trade with yourself anymore,” he said in an interview Oct. 1.

“The only ones benefiting from it (a decline in the future contract) are the line companies and we really aren’t much different than we were a 100 years ago,” Futz said.

Consolidation is a concern, but the canola contract is healthy, said Brad Vannan, president and CEO of ICE Futures Canada.

“One thing we agree on is that you can’t take the market for granted,” said Vannan, who has spoken to Futz about his concerns.

They also agree losing the canola contract would hurt farmers by making prices less transparent.

“There’s no question farmers would be less well served without a canola futures market,” said the University of Manitoba agricultural economist Brian Oleson.

His colleague Derek Brewin doesn’t think canola futures are in imminent danger.

“I think it has got lots of legs yet,” he said.

Grain company officials say the contract is a useful risk management tool they intend to keep using.

“I don’t think canola is going down,” Aaron Anderson, Richardson International’s assistant vice-president for Western grains said.

“There’s enough volume, there’s enough liquidity, there’s enough activity in the canola contract and bottom line it’s reflective of the cash trade. We will continue to support it.”

In an email Neil Sabourin, Cargill AgHorizons’ oilseed manager, said: “Cargill believes that the ICE canola futures bring value as they are a good risk management tool for all participants in the marketplace.”

Anderson said most of the other futures contracts that died, including flax, peas, feed wheat and feed barley, were much smaller with less domestic and international demand.

But grain companies aren’t trading the ICE’s new future contracts for milling wheat, durum and barley, Futz said.

“That’s a very bold statement on their part from my perspective,” he said. “They’re saying ‘we don’t need to.’”

Grain companies use futures to reduce risk, selling futures contracts to offset purchases of grain from farmers. If all goes right price gains or losses in the cash market will be offset in the futures.

A properly functioning futures market has a side benefit — price discovery. Ultimately almost all canola is bought and sold in the cash market, but the futures market arguably keeps the cash market honest.

Futz points to the drop in open interest — canola futures contracts yet to be offset — to around 100,000 in July versus 240,000 in July 2012, as a sign of the contract’s decline.

Last year was an anomaly reflecting what was occurring in the cash canola market, Vannan said. Over the last 10 years open interest and the volume of trade have increased, he added.

To encourage more trading the Winnipeg Commodity Exchange introduced electronic futures trading in 2004, Vannan said.

As grain companies get bigger they can do things internally to reduce marketing risk other than using futures, such as matching grain purchases from farmers with sales to exporters or crushers, Futz said.

“Glencore is well situated throughout the world and they don’t really need the futures market to tell them where the price is and to offset their risk,” he said. “They have traders throughout the world being able to place their canola purchase they have here in Canada overnight.”

Viterra, which is owned by Glencore, didn’t make anyone available to comment by press time.

Grain companies can offset some of their risk internally but they still need futures markets, Anderson said.

“When China comes in and buys two or three cargoes it’s 180,000 tonnes,” he said. “I’ve got to be in the (futures) market. You still need an active, viable futures contract to hedge on a daily basis.”

The potential for less canola price transparency worries Ed Rempel who farms near Starbuck and is president of the Manitoba Canola Growers Association. The industry needs to keep the canola contract viable, he said.

More trading is the answer. Farmers can help in that regard, Vannan said. But according to Futz, grain company participation is the key.

Vannan is optimistic about canola and the canola contract. Western Canadian farmers are reaping a record 16-million-tonne canola crop — even more, according to some analysts. It has been farmers’ highest-grossing crop. Futures contracts have played a critical role in canola’s success, according to Vannan.

“Canola was able to grow because the market was extraordinarily efficient because it manages risk so efficiently.”

About the author

Reporter

Allan Dawson

Allan Dawson is a reporter with the Manitoba Co-operator based near Miami, Man. Covering agriculture since 1980, Dawson has spent most of his career with the Co-operator except for several years with Farmers’ Independent Weekly and before that a Morden-Winkler area radio station.

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