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U.S. biofuel trade fight benefits canola futures

ICE Futures Canada pulls the plug on barley and wheat

ICE Futures Canada canola contracts climbed to their highest levels in more than two months during the week ended Oct. 27, as declines in the Canadian dollar and gains in U.S. soyoil provided double the support.

The currency was the biggest driver, falling below 78 U.S. cents for the first time since July. The drop in the loonie was tied to the Bank of Canada’s decision not to raise interest rates and its accompanying statement, which took a bit of a softer stance on the possibility of future rate hikes.

As for soyoil, the gains there were tied to news that the U.S. was officially imposing anti-dumping duties on soyoil-based biodiesel from Argentina. Preliminary duties have already been in place since August, effectively shutting the South American fuel out of the U.S. and creating opportunities for domestic biodiesel producers.

Even with canola posting solid gains during the week, the combination of the sinking loonie and rising soyoil still saw crush margins improve by about $10 per tonne, to $84 above the January contract.

Daily volumes were large in the canola market during the week, as participants were busy rolling out of the nearby November contract and into January ahead of the expiry of the front month.

Off the board

However, the active canola market was mirrored once again by the complete lack of trade in the milling wheat, durum and barley futures. ICE Futures Canada finally announced it was pulling the plug on those long-dormant contracts during the week, taking them off the board on Oct. 26.

Introduced in response to the end of the Canadian Wheat Board’s single desk in 2012, the milling wheat and durum futures never really caught on. Barley futures had been around in one form or another for the past century, but volumes dropped off since the futures market went electronic in 2004, with the last actual open interest seen in 2016.

The chicken-and-egg argument as to why the grain futures never gained traction was that the markets needed liquidity in order to be viable, but nobody was willing to be the first to stick their neck out and provide that liquidity, because there was no real open interest — a vicious cycle of inaction.

The relatively smaller acreage seeded to durum and barley in Western Canada may be the simplest and least conspiracy-prone explanation for why those futures failed. Those two commodities act more like special crops in many ways, with relatively few players in the durum market and with much of the barley trade taking place directly between growers and feedlots.

However, milling wheat is a different case and the lack of a Canadian futures market is detrimental for farmers from a price discovery standpoint. Grain companies were already comfortable dealing with the Minneapolis spring wheat futures for their hedging needs, which meant a Canadian market always had an uphill battle in front of it. While it may be true that there’s only enough spring wheat grown in North America to support one futures contract, the fact that the contract is based in the U.S. can distort price signals from a Canadian perspective.

Post-single desk, the general practice for pricing hard red spring wheat in Western Canada has been to present a basis level relative to the Minneapolis futures. Due to the exchange rates, that basis often comes out as a positive number showing the difference between the U.S.-dollar futures and Canadian-dollar cash price. In a normal market, a positive basis is a sign that the buyer really wants the product. However, when accounting for exchange rates, the actual cash price often turns out to be below the futures.

The calculations to figure out the true market are not that hard, but the optics presented and the fudge-factor in calculating exchange rates create difficulties for the Canadian farmer that could have been at least somewhat rectified by a functioning domestic futures market.

About the author

Columnist

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

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