Don’t write off ICE Canada’s grain futures just yet

CNS Canada — Milling wheat and durum contracts offered by ICE Futures Canada have not seen any actual trade in over a year, and it’s been five months since feed barley last had any open interest — but the exchange isn’t ready to give up on the grain contracts just yet and will explore its options over the next few months.

“Ultimately, what we need to do is make sure our contracts are relevant to the way the trade functions,” said Brad Vannan, CEO of ICE Futures Canada.

Transportation issues that hampered grain movement across the Canadian Prairies this winter had the potential commercial participants focused on other things than “shepherding a new futures contract” for the time being, he said.

With the backlog of grain now being worked through, he expected to have more conversations with the industry over the summer to discuss the lessons learned and possible next steps.

The ICE Futures Canada milling wheat and durum contracts were introduced in 2012, as the end of the Canadian Wheat Board’s long-standing monopoly on marketing the western Canadian crops that year created the need for other pricing options.

With the Canadian futures still struggling to gain a foothold, the U.S. wheat markets have so far provided the only liquid forward-pricing mechanism.

“Over our two years of experience, post-Wheat Board, we’ve had two entirely different marketing environments and they’re almost polar opposites,” said Vannan.

He noted that the 2012-13 crop year saw high prices and very good transportation in Western Canada, while 2013-14 has been characterized by logistical problems.

“The normal is probably in the middle… but we need to make sure the market functions well, even under extreme circumstances,” said Vannan.

“What works better?”

Canola was also caught up in the same logistical issues that hampered Canadian grain movement over the winter, and basis levels relative to the established ICE futures market became very wide at times. However, Vannan said, wide basis levels aren’t a problem in and of themselves, as long as the movements are consistent with the market.

Canola basis levels were wide, but predictable, over the winter, while wheat bids in Western Canada relative to the U.S. futures were more erratic, industry participants told Vannan.

It was premature to draw conclusions, he said, but noted the erratic wheat basis was a sign that the business was linked to a product that did not correlate well.

Vannan added that “using a Canadian wheat contract won’t necessarily solve all of your problems… as nothing will work perfectly. But what works better?”

There were some advantages to be seen in Canadian-based grain contracts, he said, with a broader cross-section of the trade now having experienced that.

— Phil Franz-Warkentin writes for Commodity News Service Canada, a Winnipeg company specializing in grain and commodity market reporting.

 

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