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Limited Grain Marketing Choice in the Post Single Desk Era

- Wednesday May 2, 2012

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David Walker
Edmonton, AB
Canada
phone: +01 780 434 7615
email: davidw@open-i.ca
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The absence of a functioning futures market may be regarded as nothing more than an inconvenience for the moment. But it could limit the effective choices Western Canadian farmers have for marketing their grain in the post single desk era. (830 words)

The prospects for effective futures markets for Prairie grain are not overly exciting. After a minor flurry of activity during the first week of trade back in Janaury, there has been next to no activity on the new Inter Continental Exchange (ICE) futures contracts for three months - without any trade for two weeks in early March, Chart 1. It is probably not much of an exaggeration to suggests that individually hundreds of farmers who could have contributed to this trade and also have taken two weeks holiday without missing anything. Further, recently open interest, which reached a very meagre 16,000 tonnes for the three contracts combined, has declined slightly, Chart 2.

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ICE trade volume
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ICE open interest

The situation has, of course, not been helped by the failure of ICE to have an old crop contract to coincide with the end of the Canadian Wheat Board's(CWB) single desk. This would have enabled some very direct comparisons to be made and allow initial trade of grain in the bin rather than limit it to grain to be seeded this spring. But even with just new crop contracts, one would have expected more interest in the months leading up to seeding during which some pretty heavy duty and price risk laden decision are being made by farmers.

Most farmers probably envisioned one of the advantages of the end of the CWB monopoly would be some solid price information about the crop to be seeded and the opportunity to reduce some of their risk. This is clearly not being provided this year by the existing futures market with long periods without trade. At the same time there is a real scarcity of publically available cash price information from grain buyers. If it is being published on the websites of the major grain companies, it is with some notable exceptions very well hidden.

Further past cash prices are equally not readily available and in this context location and grade discount information is very limited. The risk associated with these can not, of course, be hedge on the futures market. But knowing how they have varied in the past provides some guide as to ranges that can be expected in the fairly immediate future.

Information that is available on CWB asking prices over the last five years which may or may be indicative of actual sales values indicates that premiums and discounts for Atlantic and Pacific markets flip flop but that values for the latter are most often not available, Chart 3. But the latter matter is a different challenge.

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Vancouver and St Lawrence wheat prices

Likewise discounts for lower protein content are variable. A 25 percent discount for 11.5 percent under 13. 5percent has been evident for extended periods over the last five years, Chart 4. Again this is not something that the futures markets can address, but an awareness of this quality dimension is needed. It is readily available to American farmers south of the 49th.

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13.5% and 11.5% wheat prices

Beyond providing a very transparent indication of value, which is essential for any informed marketing decisions, a functioning futures market is likely to reduce the cost of marketing grain and increase returns to farmers.

It is not by chance that when grain is held in commercial storage between being sold by farmers and bought by end users, there is usually a futures market to allow values to be hedged. The purpose of this marketing tool is, of course, to provide a mechanism by which traders are able offload their price risks. They an in effect almost instantly able to sell the grain they have bought. At the other end of their operation they balance their books by buying back the futures when they make a deal, directly or indirectly, with an end user of the physical grain.

Without this mechanism, they are likely to make allowance for the chance that prices might decline while they own the grain. This will surely widen their margin of trade. There is nothing cynical about this. They are simply taking precautions against taking a risk for which they need a return. It is a necessity with special crops where hedging opportunities are not available.

This is not, however, the only way that grain can be bought and sold and risk handled. It can be shared as opposed to offloaded. The well practice technique of pooling allows risk to be shared by all participating farmers and averaged.

If the CWB, back stopped financially by the federal government, is the only buyer offering pool pricing and the futures market does not become active, it is likely that the CWB will pick up most of the business.

While pooling may not be mandatory, most farmers are likely to settle for it as their best option. Choice may, in effect, be limited.

David Walker
May 2, 2012


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