Seven months after the Canadian Wheat Board’s 69-year-old marketing monopoly ended and Western Canada’s wheat went up for grabs, much of the risk business associated with buying and selling it has fallen to the Minneapolis Grain Exchange.
The Wheat Board, which was one of the world’s biggest grain marketers, hedged much of the price risk on grain it bought from farmers in Minneapolis (MGEX), and also on the Chicago Board of Trade and Kansas City Board of Trade.
But the end of the monopoly splintered the CWB’s former risk management business across a larger number of grain marketers and buyers, leaving those exchanges plus new contracts from ICE Futures Canada to fight for trading volume.
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Canada’s spring wheat crop in 2012-13, the first after Ottawa scrapped the monopoly, produced unusually high, uniform quality. That feature has directed much of the risk management business to MGEX, whose hard red spring wheat contract closely resembles the profile of Canadian spring wheat, said the head of one of Canada’s medium-sized grain handlers.
"Because of that homogeneity, I think that this year in terms of Canadian hedge participation, Minneapolis has been a clear winner," said Brant Randles, president of Louis Dreyfus Canada, the Canadian division of the privately held global commodities trader. "In another year where we might have highly varied qualities, I think all exchanges could benefit."
Louis Dreyfus Canada uses MGEX, the CBOT and Kansas City Board of Trade (both of which CME Group owns) and, when there’s liquidity, ICE Futures Canada’s Canadian wheat contracts for hedging and proprietary trading, depending on the wheat class, Randles said in an interview.
Canada is the world’s second-largest producer of spring wheat, used for baking, and the No. 6 grower of wheat overall.
The three exchanges brought their sales pitches to the Canadian industry this week at the Grainworld conference in Winnipeg, a forum where U.S. exchanges were seldom seen before.
MGEX has seen its spring wheat futures open interest climb by more than one third from its low in 2012 to around 43,000 contracts, said James Facente, its director of market operations, clearing and information technology.
"I can say with certainty that there are many Canadian participants in our market and much of the open interest gains we have seen is in direct correlation with the changes in the Canadian marketplace," Facente said.
The big three Canadian grain handlers — Viterra, owned by Glencore International, Richardson International and Cargill — are all active at MGEX, he said.
The spring wheat MGEX trades follows a similar growing season and has similar characteristics as the Canadian harvest, unlike winter wheats traded in Chicago and Kansas City.
CME Group’s CBOT may not trade the same kind of wheat, but as the world’s wheat price benchmark it offers unmatched liquidity.
Adding in the recently acquired Kansas City Board of Trade, CME controls 81 per cent of the world’s wheat futures volume and 89 per cent of wheat options, said Susan Sutherland, senior director of grain and oilseed products, in a presentation at Grainworld. The conference was attended by grain companies, analysts, traders and farmers.
"The recent addition of (Kansas) wheat products to our deep and liquid Chicago soft red winter wheat futures and options offerings will provide new trading opportunities for market participants both in Canada and around the globe," said Tim Andriesen, CME Group’s managing director of agricultural products.
CME Group declined to comment on the level of participation from Canada since the wheat monopoly ended.
ICE Futures Canada, the Canadian arm of Atlanta-based IntercontinentalExchange Inc, entered the ring with new Canadian milling wheat and durum contracts 13 months ago. Canadian traders already know ICE well for its popular canola contract, but the new offerings have been all but ignored.
Open interest in ICE Canadian wheat and durum is a paltry 36 contracts combined, representing 3,600 tonnes of crop.
Brad Vannan, president of ICE Futures Canada, compared the Canadian contracts with Paris-based wheat contracts, which took years to gain traction.
"It takes time for a market to fully comprehend and respond to changes," he said. The advantages ICE offers include Canadian delivery points and currency.
The ICE contracts have also suffered from the high quality of the Canadian crop, which narrowed the cash price range between feed and milling wheats and left less risk, he said.
Randles agreed that the new ICE contracts may attract interest over time.
"People haven’t had time to focus on ICE because we’re trying to make this transformation to an open cereals market. Secondly, they’ll look at how we can support the new contracts."
— Rod Nickel is a Reuters correspondent based in Winnipeg.
