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More volatility likely from expanded trading hours

ICE Futures Canada canola moved higher in most months during the week ended May 18, initially dropping lower with long liquidation before bouncing back up on the back of solid end-user demand.

Tight old-crop supplies and continued exporter pricing are expected to keep the front-month July contract supported going forward, but it should eventually drift lower to come in line with the new-crop months. Weather conditions over the growing season will likely dictate the direction in the futures heading into the summer months.

ICE barley futures saw some mixed commercial activity during the week, but ended unchanged overall. Milling wheat and durum were largely untraded, although gains in U.S. wheat futures were enough to pull the Canadian wheat values up as well.

In the U.S., grains were up and soybeans were down during the week. Mounting dryness concerns in the U.S. Plains, along with talk of production problems in many other wheat-growing regions of the world, provided the catalyst for some heavy short-covering in wheat — pulling prices up by 75 cents to nearly a dollar per bushel.

The advances in corn were more subdued, as the expectations for a record-large U.S. crop tempered the short-covering move higher.

Soybeans bounced around during the week, ending lower as the unwinding of spreads against corn weighed on prices. The advanced state of the U.S. winter wheat crop, and the resulting early harvest, will lead to more double cropping of soybeans. Analysts now estimate double cropping beans could see actual acres up by two million to four million above the U.S. Department of Agriculture’s latest projections.

Trading hours, and their looming expansion in Chicago, were a hot topic in the U.S. markets during the week as ICE Futures U.S. launched its new slate of soybean, corn and wheat contracts. The new electronic ICE platform is open 22 hours per day, closing at 5 p.m. CT. While activity was light in the first week, the long hours have the potential to create direct competition for the Chicago grains and oilseeds.

The CBOT (Chicago Board of Trade) fast-tracked a plan to expand its hours, and as of May 20 will be trading in a continuous 21-hour block every day, only shutting down for three hours between 2 p.m. and 5 p.m (all times Central). Closing settlements will still be based on prices at 1:15 p.m., when open outcry stops in Chicago. Kansas City and Minneapolis will be trading the same hours as Chicago. Those new hours replace the previous practice, which saw the Chicago market close each day at 1:15 p.m. before reopening for an overnight electronic session at 6 p.m. That overnight session ran until 7:15 a.m., at which point the CBOT closed for a couple hours before reopening at 9:30 a.m.

Aside from the need to keep up with the Joneses at ICE Futures U.S., the main argument in favour of the long trading hours in Chicago is that they would allow participants to immediately trade off of any potentially market-moving USDA reports. The supply/demand and crop reports are traditionally released when the markets are closed, allowing traders a little time to digest the numbers before the markets open.

However, having the markets opened when the reports are released is also an argument against expanding the hours, according to some traders who expressed concerns over the likely volatility.

There’s an argument to be made that the longer hours replace quality with quantity. The overnight sessions are already relatively illiquid, and expanding that period of thin trade can be seen as being largely a cash grab on the part of the exchanges.

Difficulties

From a simple staffing standpoint, keeping the agricultural markets open at all hours of the day poses any number of difficulties for the grain companies tracking the futures and trying to set cash prices for farmers, especially the smaller brokerages. Complaints from that sector convinced the CME Group, which operates the CBOT, to back away from an initial plan that would have seen the market remain open until 4 p.m. every day. Such a move would have forced overtime, or the need to hire more workers.

A group of U.S. market participants is also circulating a petition calling for a boycott of exchanges using the extended hours, questioning the benefit of “trading for the sake of trading.”

In Canada, the canola market will still be closing at 1:15 p.m. — for now — but has been at the forefront of changes to the grain trade in recent years. ICE Futures Canada was actually the first North American agricultural market to move to an all-electronic platform, back in December 2004, when the floor shut down. Canola futures currently trade from 7 p.m. to 1:15 p.m. the following day, but the bulk of the volumes occur during the hours when the Chicago open outcry floor is open (9:30 a.m. to 1:15 p.m.). With ICE Futures U.S. already trading for 22 hours a day, and the Chicago market also expanding, it is very likely that the Canadian market will eventually be forced to follow suit. However, ICE Futures Canada has been quiet on its plans so far.

Large global trading firms and multinational grain companies moving money around definitely stand to gain from the move to near non-stop trade. However, what the longer trading hours will mean for farmers growing the commodities remains to be seen.

About the author

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Phil Franz-Warkentin - MarketsFarm

Phil Franz-Warkentin writes for MarketsFarm specializing in grain and commodity market reporting.

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