open i

In addition to the absence of trade are discouragingly wide spreads between bids and offers. This is surely a sign that no change is imminent.

The question arises as to why the adoption of the futures market has been slow in taking up the central role that it has in the US. Or more positively when will it start to provide a meaningful risk management service for the industry.

The specification of the contracts appear to be appropriate with, for export dominated milling and durum wheat markets, the same general Saskatchewan aspect for delivery as the existing canola contract. In the case of milling wheat there are Alberta delivery premiums and Manitoba discounts reflecting the dominance of west coast markets. But for durum the premiums are for Manitoba delivery reflecting the dominance of the Atlantic market for this class of wheat.

The barley contract appears to be mainly domestic in nature with the smell of Feedlot Alley about it - locational premiums and discounts reflecting distance from southern Alberta. The main difference from the existing Western Barley contract being a return to the Saskatchewan elevator delivery for par delivery from the southern Alberta specification.

These contract specifications were published last December and they received little advanced publicity as did actual trading itself in January, possibly because of previous false starts for the open market and existing legal challenges at the time. Lack of publicity might explain the rather hesitant start of trade but not, of course, the subsequent hibernation as spring approaches.

Judging by press coverage and such, there has been understandable concern over the challenge for farmers in pricing for the contract specification before having any indication of the quality of their harvest. The chance of not making the contract grade is much greater than with canola where the bulk of the crop grades as Number 1 Canada.

Further the discount for being graded down, or indeed the premiums for being graded up, vary with time and are probably not well understood by farmers. In the past these differentials have only been apparent many months after the crop was delivered in the context of pool returns.

Actual sales premiums and discounts in a meaningful time frame have, of course, been regarded as confidential by the CWB in the context of their sales activity and the sensitivities of their customers. Moving forward, they may regard such information as proprietary in a competitive market environment.

The best information available is probably CWB offer prices which in a general sense probably reflect quite closely actual sales prices. These offer prices suggest that at times over the last five years the discount for 11.5% protein 2CWRS below 13.5% percent has been more than $50 per tonne, or 25 percent of value, Chart 3. At other times it has been immaterial.

A further dimension of value is, of course, location and for this the CWB has always paid farmers fixed discounts reflecting actual cost of transportation assuming wheat was worth the same on the two coasts. CWB in the past has not been in a position to even offer wheat on a continuing basis at the west coast and hence provide offer prices, so this indication of value is quite limited. But it is apparent from the limiteds information that is available there is no constant differential between values at the two coasts, Chart 4.

While hedging will not provide protection against finer changes in value reflecting quality and location, it does provide protection against more generally movement in prices. But for the moment and without much in the way of prices for the dimension of value the industry is struggling to understand what these residual risks are.

It is difficult to anticipate when futures market activity will pick up, particularly while no cash prices are available. In the absence of any trade the first sign of an end to market hibernation will be a narrowing of bid offer spreads. Perhaps this is something that the ICE could publish.

904 words