Posted by: usset001 | October 25, 2011

New futures contracts for wheat, barley and durum coming to ICE Futures Canada

ICE (IntercontinentalExchange) Futures Canada – formerly known as the Winnipeg Commodity Exchange – has announced plans to introduce new futures contracts for milling wheat, durum wheat and barley. This action assumes approval of legislation to end the Canadian Wheat Board’s monopoly for sales and marketing of Canadian wheat and barley. (read more here)

Let’s assume these new contracts are introduced. Will these contracts succeed? What exactly constitutes success in a new contract? These may seem to be simple questions, but the answers run deep.

A new milling wheat contract for Canadian wheat presents a competitive threat to the Minneapolis Grain Exchange (MGEX). The MGEX has been anticipating changes in Canada for some time – several years ago they amended their spring wheat contract. The revised contract they no longer requires “U.S. origin” wheat for delivery.

Will the new ICE milling wheat contract succeed alongside the MGEX contract? I have my doubts. The history of futures trading shows that when there are two similar contracts competing for trade and hedge volume, activity migrates to the contract with the greatest liquidity. The MGEX contract is active and liquid. The ICE contract may survive if it can distinguish a real difference between Canadian spring wheat quality and value vs. U.S. spring wheat. I have bought and traded both products, and the differences are not large.

How about new contracts for durum and barley? I have more doubts. Over the years, durum and barley futures contracts have been tried several times without success. The most recent attempts date back to 1996 and 1998 for barley and durum, respectively, at the MGEX (who list them as “dormant” contracts). These are small crops and, worse yet, each crop features two distinct markets that make it difficult to write a futures contract that appeals to all parties.

Consider the market for durum wheat. In the U.S., there is the #1HAD (hard amber durum) market that serves durum millers and domestic pasta manufacturers. There is also an export market for #3AD. It is very difficult to write delivery specifications in a futures contract that will satisfy both the exporter and domestic miller. The full participation of both users is needed to create a successful market. By the way, lower quality #3 durum that is exported overseas may come back to the U.S. market as premium priced “100% Durum Semolina made in Italy.” Go figure.

The barley market also gets separated into two distinct markets, malting and feed. Similar to the problem in durum, it is difficult to write delivery specs for a futures contract that will satisfy both the malting firms and feed barley users. Besides, the buyers and sellers of feed barley already have a useful hedging mechanism, better known as the corn contract.

The quality differences between malting and feed barley are difficult to describe. About 15 years ago I spoke with a North Dakota barley producer in the western part of the state. I asked him why he sold his barley to an elevator located 30 miles east when his local elevator was just a few miles away. He explained to me that when he sold his barley locally, he sold feed barley. But 30 miles east he had malt barley and a premium price. Go figure.

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