Winnipeg Futures

[samhill]

JD, I don't see any reason for them not being able to get out. It comes down to delivery. Take delivery or deliver, as long as the delivery point is accessible. If you won't, then you're trying to control a market that your only interest in is speculating. Nothing wrong with speculating, but a contract is a contract.

[jdepape]

Let's say the cash price for barley is $200 - and the futures are $210

The long wanting to get out starts to offer it - lower and lower, but no bids are coming from the short.

The price goes to $180, $170 then $160 as the long pushes it lower. Yet the cash price is still $200. And yet no bids from the short (which should be a red flag to the exchange; why is the short not liquidating at $160 vs cash at $200?)

The only economically rational thing for the long to do is to stop offering it lower (to liquidate) and just stand for delivery and turn around and sell it into the cash market, hopefully at something close to $200.

It may have ended a bit differently if he could sell futures and re-deliver - but he couldn't with this contract. Nor could he sit on the barley and pay storage - it had to move.

The idiotic thing is the short (a farmer) doesn't buy-in his contract - even at deep discounts to cash. His sole intent in entering the contract was to sell his barley - and get it moved off his farm.

Now imagine the long was actually a hedger - his long futures was against a sale. So, not only does he not have a hedge anymore, he has cash barley - likely out of position - to liquidate.

That hedger never returned to the market. His (correct) expectation when entering a futures contract is that he can liquidate without going to delivery. Or re-deliver. Or sell a deferred contract at a carry that would pay for the storage fees. But none of that was available.

In this contract (may not be the same version as the Jim Rogers story), more than 25% of the OI ended in delivery. Far too much.

(Sounds like your Jim Rogers story - but it was a farmer on the short side and it WASN'T Rogers on the long side.)

So trying to avoid taking delivery - even with an accessible point - doesn't mean you're trying to control the market. Just trying to use it as it should be - and abuse on the other side killed it for hedging, its primary use.

[mcdon]

JD,

Delivery of 2500 barley didn't happen during last years of contract, funds were long majority of open interest, they rolled positions.

[jdepape]

Like I said - it may not have been the same version of the barley contract that you referred to and Rogers traded. And like I said, it may have been the earlier one we called Alberta Barley.

Regardless - I believe I made my point about delivery.

I'm intrigued by the Rogers story. $10M - holy crap. Do you know where than number came from? Must have been a huge position - is that the 2500 you refer to? If so, that's $200/tonne loss! How!?

[mcdon]

JD,

I am conservative at 10m.It's not hard to figure out if you know entry and exit and activity in between, I find it hard to believe that you weren't aware of jt. I wasn't the only one aware of what was happening. Begs the question, don't know if you were involved in new contracts, but I scratch my head wondering how anyone comes up with new contract without knowing details of failed contract. Answer: you don't.

[jdepape]

So give us details.

If you're talking losses between entry and exit afraid that's not going to give you a good measure of contract "performance".

How much of the $10M was because they were simply on the wrong side of the market? Entry and exit would tell you that much.

And I'm sure not many would be privy to "activity in between". I assume from your comments that you were.

The measure of a contract performance is how far from convergence (or correlation to cash) was it during expiry (delivery).

To that point - the market may have dropped $100/tonne while they were long, but if the contract only pulled away from logical cash values (or where it "should be") by $25 (let's say) around expiry, a forensic audit would only look at the $25 as a loss due to contract performance. This would not only apply to the net position but also the "activity in between" you mention. (But I'm afraid an exchange is not as concerned with activity (or convergence) during a contract's life as they are leading up to and during expiry.)

I'm not doubting you that they lost (conservatively) $10M, but what I'm asking for is the details to say it was because of the contract - so far you haven't. In fact, what you suggest about entry and exit and "activity in between" suggests a good portion of it may have been simple trading losses.

It's a huge number to throw out there -
to put it in perspective, on 2,500 contracts (50,000 tonnes), which would be a large position in barley, $10M would be $200 per tonne.

let's get some detail around it to support it.

[mcdon]

JD,

"sure not many privy to activity between entry and exit". Plain as day for any professional trader, casual observer completely missed one of the great trading opportunities of the wce contracts. I can't believe you missed it. As for details,position was closer to 7500, position held for 2 years. Figure it out. Phone around to your "sources", anyone that traded barley during that time that was worth their salt knew exactly what was happening. This is why new contracts won't work, those responsible don't have a clue why previous contract failed.

[farmaholic]

OMG. why is it that people with supposed knowledge of what makes futures contracts tick can't even agree on the "what and why" things are the way they are? This comment comes from reading posts from many threads.

How the hell are most producers who've been mostly production oriented their whole careers supposed to get a handle on it? Especially if it supposedly isn't working.

[samhill]

No, I still don't see it JD. A grain exchange should actually exist for producers and end users. If specs want to play, which does provide liquidity for specs, then they accept the risk of delivering or taking physical.
A farmer who sells cash and goes long is now a speculater. A speculater who is long in a thin market is risking delivery, but there's end user willing to take delivery for a price. If that doesn't exist, then there is no market. But it's pretty apparent that there are producers and end users so I am too thick headed to understand your scenario. If the market is too small, that the cost of operating the exchange is too expensive for only a few contracts, it will end, but in the computer age that seems unlikely.

[jdepape]

mcdon:

- There was an issue in 2007 about the delivery spex of the <b>Western Barley</b> contract that you say cost Jim Rogers millions.

- You say their position was around 7,500 (contracts, I assume). If you look at the historical records of the contract, the highest OI in Western Barley in that era was about 13,000 (all months combined, but over 11,000 in the front month) which would make Rogers about 58% of the OI – and well over the average daily OI. Although you say they were the majority of the OI, if I have the dates right, there is no way they could have kept a 7,500 contract position for two years, since there were many days when the total OI wasn’t anywhere near 7,500 contracts.

- Here’s another thing that doesn’t add up. I assume the two-year period of Rogers’s position ended in 2007. But the version of the contract that was trading in 2007 started trading in Aug 2006. If he entered his position two years before 2007, it would have been in the old contract that wasn’t really trading – or, more logically, he started trading the new contract. A look at historical data shows prices rose from about 120-140 in 2006 to right around 180-200 in 2007 and 240-260 in 2008. From this it’s unclear – how did they lose $10M being long in a market that rose somewhere between $60-$80 and $110-$120?

I could have this all wrong but I am only going on your sketchy description of what happened and filling in the blanks with data. If you want to make the point that they lost money because of the contract design, you’re going to have to be much clearer on the details.

But I think in more general terms, you appear to want to discredit any Winnipeg futures contracts and those that may have had a hand in their design. So I will ask - how would you have done it differently?

I have no idea what I did to piss you off, but you are clearly agitated (at me). But rather than get personal, how about we just stick to real facts if you have them.