Winnipeg Futures

[mcdon]

mbdog,

I think your idea of a uniquely Canadian product follows the product differentiation strategy. However it could serve to restrict the deliverable supply (no product outside of Canada deliverable) which could affect convergence between cash and futures. Also, given the state of the transportation system, don't think the export market considers Canadian grain with the same regard as it did 25 years ago.

Re western barley futures; The first prerequisite for designing a futures contracts is the existence of a commercial need for it. i.e. commercials must be willing to assume both long and short positions, their motive is usually referred to as price risk. I don't think their is the willingness on the part of the feedlot sector to manage risk via the western barley futures as it stands right now. No commercials willing to assume a long position means no contract.

[charliep]

There are feedlots in Alberta who run pretty sophisticated risk management programs for their feed grains and I think would use. They use CBT corn today with all the challenges. Their comment again is that it is hard to use a market when there is no volume.

[jdepape]

mcdon:
WCE canola change - maybe I'm just getting old but I don't recall any outside consultants designing the canola contract. WCE hired Dr. Craig Pirrong to review the issues around the old contract ("what went wrong") but he did not design the new contract. BTW - Craig is without doubt the preeminent expert on futures design.

The delivery mechanism was unique when we designed it. Now its used by CBOT on their redesigned contracts.

101:
graincos aren't using them because no one else is. Liquidity. Graincos and farmers are natural shorts - end-users need to be comfortable using it. And it has little to do with them standing for delivery; it has more to do with correlations.

Other potential longs include specs, funds and "prop traders". I was trying to generate some interest with a couple of prop traders in Chicago - they were keen to trade ICE Milling Wheat as a spread against MGEX or CBOT - to them it would be a quality and FX (sorry) play. But they didn't have a good handle on what the underlying cash grain was trading for - so no idea what the ICE contract should trade for. (Not once did they say they were concerned about delivery.)

mbdog:
The ICE Milling Wheat contract was designed as a Canadian alternative to MGEX. Different grades, different currency and different delivery.

Interesting note - some commercials wanted to have it trade in USD because "wheat is ultimately traded in USD and farmers don't care about FX". I think we can tell from a previous thread that farmers DO care about FX. If we had made it trade in USD, and the trade used it, we'd be having the same discussion around FX and basis. Clearer heads prevailed.

[errolanderson]

In its hayday, Western Barley was one of the most efficient futures contracts in North America.

An Alberta farmer would short (sell) Western and a company like Sask Pool would come and pick it up in the yard. There was simply no need for elevators. I was very proud of the contract, but maybe it's fault is it worked too well.

Loss of Western Barley was a huge loss growers and feedlots.

[mcdon]

At the end of the day (approx. 2007) the long side of the western barley futures was made up of almost exclusively a long fund(s) position. As I mentioned above you cannot expect a futures contract to work efficiently if you do not have a commercial content on bot sides. The question should be "why did feedlots stop using it ?". Jim rogers experience should shed light.

JD, re funds using ice, no fund in their right mind is going to start using a contract without commercials on both sides, no way of calculating risk. I f they had no questions on delivery , they are sitting ducks. NEED COMMERCIALS ON BOTH SIDES FIRST.

[jdepape]

mcdon - agreed on the commercial content.

My point about the prop traders not caring about delivery was to underscore the point that futures users don't look at futures as a means of procuring cash grain. At least the smart ones don't.

One iteration of the barley futures contract failed because delivery was too attractive. It became a cash forward contract - most of the OI ended up in delivery making it impossible for the hedgers and specs to get out through liquidation. Maybe that's the version Errol mentioned. I can't recall but it may have been the one called Alberta Barley (instead of Western Barley).

[farming101]

Yes producers would generally be short a futures position. Sorry about that in the earlier post.
Is there significant offshore/foreign use of the ICE canola futures? If so, why does it work?

[mcdon]

JD,

To suggest that it is not necessary for funds to pay attention to the specs including delivery is wrong. You completely missed the Jim Rogers experience, it ended with that fund losing approx 10 million because it was ill informed re contract specs. Second example, all time best squeeze was fund squeezing CWB in Minni wheat (2008) because it know delivery specs better than CWB.

[jdepape]

CWB got into trouble in 2008 because they didn't understand spreads.

They hedged a 4 mmt FPC program in the nearby (Dec) with the intent to roll it forward. The s/d was tight that year (which the CWB knew). 4 mmt is a huge position for MGEX, let alone in one contract month. Everyone (at least everyone I know in that market) knew the CWB was short - and the knives came out. Don't know the fund you refer to but I know commercials on the long side that did very well by that debacle - as well as some specs. By Jan, the CWB was the sole short in the March.

From discussion I had with them about that situation, I'd say they understood delivery - they just didn't understand spreads.

When I asked why in the world would they be short the spreads when they knew the s/d was tight, their answer was "it always worked before".

[jdepape]

mcdon - you're right, I missed the Jim Rogers story.

What specifically did they not understand?

What are you measuring when you say they lost $10M? Their position loss? The loss from a lack of convergence? Or something else?

[errolanderson]

Realize the Rogers fund was the key long in the end, but why was that?

Why were there no spec longs and feed mills etc not using the contract?

Was it a lack of promotion?
Was it a general lack of knowledge?
Was it because it actually reflected the true cash market in southern Alberta?
Was it because it was meant to be?

[mcdon]

JD writes "barley contract failed because delivery was too attractive making it impossible for hedgers/specs to get out". I assume that you mean delivering against short position worked to advantage of short and against the long, This is precisely what I said above, contract designed by grain companies for grain companies. Unfortunately, there are few that actually know what happened that are willing to say it openly i.e. don't bite the hand that feeds you. Which brings me back to my other point, if a contract is to work it has to be designed by an unbiased party that understands futures contracts. I don't know of anyone in Canada that fits that criteria. The ice contracts are an extension of the old wce contracts and really don't have a chance of working.

[samhill]

OK. I'm pretty non informed about commodity exchanges. I understand most of the mechanisms, not all. But if you have a buyer and a seller and a delivery point that's reasonable I don't see why it won't work. Certainly speculators provide liquidity, but I don't see them as necessary. Flax contracts used to work a long time ago, and were a good market indicator for a small volume crop. I think the WCE dissolved b/c it worked to well for farmers, so obviously had to disappear.

[jdepape]

If you get most of the open interest in a contract ending up in delivery, the contract has failed. The true hedgers - the ones that want in AND OUT - can't get out if they are forced into delivery (whether they are long or short).

Speculators add liquidity but only if they can get OUT - just like most hedgers.

Flax was kept on the board long after it had any open interest or trade. We figured that as long as it had a bid or offer it was providing some form of price discovery.

After a while, even the quotes disappeared. The interests of the exchange aren't served if you have a contract flat-lining with no trade or OI. So it was shut down.

[mcdon]

Saw,
re speculators, they are critical to the performance of a futures contract. In the days of the wce locals and retail trade made up the spec content. Together they served to narrow the bid/offer spread. Locals often traded books larger than that of grain companies, that is how significant their contribution was.

DP, longs can always get out, it just depends how badly they have to bend over. That should be a hint for you as to why the barley contract failed.