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.

[mcdon]

JD,

Your analysis is flawed and it has led you (and readers)to the wrong conclusion. Firstly, if you want to confirm the existence of a fund in a market, do what I did, go to the source. JR listed a long barley position on their website for everyone to see. Re size, everyone that had any skin in the barley futures during that period knew that they rolled their position on the last trading day of the month prior to the month preceding the delivery month. It was like clockwork. Take the open interest prior to 'roll day" subtract OI from the following day to get an approximate value. There is no room for discussion here, it happened exactly I have portrayed it. Like I said above get on the horn and ask anyone who had skin in the game.

Nothing personal JD but I do find it amusing when you challenge the facts as I have presented them especially when you don't have a clue with regards to how the barley contract unfolded. It is concerning that someone with your influence could be so ill informed given that you had some part in developing the new contracts. How do you promote new contracts to funds (like you said you did)after one of the most high profile funds just got bent over.

[jdepape]

Some of us are keenly interested in how this "event" could have happened and you seem to be the one in the know. So help us out:

The facts as you presented them:

1. Rogers was long 7500 contracts of Western Barley in 2007.
2. They held the position for two years, rolling it forward, one month prior to each expiry.
3. They lost $10M because the delivery mechanism was flawed and in favour of the short.

I added:
Through the period in question, prices rallied dramatically (which would be in their favour, being long).

I don't think anyone is interested in your opinion of me, least of all me. But I am certain there are some out there (myself included) that want to know what the problem was - as you see it.

So someone lost some money? So what? It happens a lot. The simple question for you is <b>HOW?</b>

Please give some detail, some math - anything to support your point other than "it happened exactly as I portrayed it", or "ask anyone who had skin in the game".

I'm asking you. One thing an exchange - any exchange - will never do - is listen to criticisms without substantiated facts to clearly identify the issue. Over the years, I have heard countless arguments about how the contracts are flawed - and the arguments usually sound like yours. They lost money because they got "caught" and therefore the contract is to blame. Well, I'm asking you to take the opportunity to demonstrate how Rogers lost money because of the contract design.

Only then, when we have your description, can we truly assess what the problem was. Quite frankly, you haven't done it so far.

I entered this discussion because I thought it would be interesting to discuss futures contract issues, not to spar with someone tossing lame personal shots. I sincerely hope you can do this without falling prey to the temptation to continue to make it personal.

[jdepape]

mcdon:

In the absence of any more details from you, I did what you suggested and investigated. Here’s what I dug up:
Using your facts and historical market data:

In 2006, the position would have gained roughly $8.00/tonne.

In 2007, the position would have gained roughly $6.00/tonne.

In 2008, the position would have lost about $140/tonne. I suspect this is where they got hit.

Your argument that we’re taking about is that the contract design favoured the short. Just being long and wrong isn’t about the delivery terms favouring the short (remember 2008 is when all commodities melted down).

What should also be noted is that the market was generally in a carry. When rolling long positions in a carry, you give up the spread when you roll. Not a true “out of pocket” loss, rather an opportunity cost. Markets tend not to earn their carry meaning, all else being equal, the deferred market will gravitate back to the nearby price.

Also, they would have rolled from old crop to new crop – in 2006 that was through an inverse which is good when you’re carrying a long. They picked up around $26 in “opportunity”.

I’m going to guess you thought the market hurt them because the spreads got too wide. I would agree that wouldn’t have helped. As a long, if you give up $10 rolling through a carrying charge spread, for your position to keep working the market in general has to rally $10 just to counter. (Even so, they made money until the crash of 2008).

Here are important facts and questions:
1. They were more than 50% of the OI – using your blanket number of 7500 contracts they were likely the WHOLE OI at times.

2. They advertised their position and intentions (to roll) to the market – you said everyone knew.

The question is why – on both points?

You become quite vulnerable at that proportion of the market. Where I used to work we would get reined in if we ever approached 50% of the OI because it changes your whole risk profile. A good rule is “you want to be IN the market – not BE the market”. And this was a company that would see taking or making delivery as just part of doing business – unlike a fund. So if the spreads got too wide, they just stood on delivery.

But when one player is over 50% of the OI (or close to all of it), it changes this dynamic. Who else is long and willing to stand for delivery?

And to be so systematic about rolling is deadly; no, idiotic. No one on the other side is going to help you out. Even I knew about “roll day” – we saw it in canola too – even though I wasn’t trading grains at the time (I was more into FX back then).

Think about this from the short side. You are short and can deliver. But when the spreads widen out to full carry (and beyond) and someone is advertising that they will be there to sell the spread to you - it is a gift. You would be an idiot to deliver under those circumstances.

A seasoned trader, wanting to maintain a long position and understanding spreads would have been looking to roll forward at any opportunity – not on a predetermined “here we come” day.

From what I can tell, they shot themselves in the foot - and then were long and wrong in 2008.

[mcdon]

JD,

You are getting closer but still missing an important point so I will tell you. The most important part is the spread that they rolled their position at. I have traded longer than you so my memory isn't what it was but I do know that their entry and exit points were approx $120. Roll 5 times per year, often beyond carry and ave long position increases accordingly.

The point you have completely missed is that they were forced to roll their position given a spec position limit of 250 that they could stand for.I know you are going to say there are provisions for standing for delivery but that argument is garbage. For a contract to work there has to be a threat that a long will stand for delivery. In this instance given the make up of the OI and the restrictive position limits, the threat of anyone standing for delivery was zero. As a result, the short was at a clear advantage. Oh, and the grain companies had a say in the position limits (grain cos designing contracts for grain cos.).

I find this thread discouraging for a number of reasons. It reflects poorly on the state of the futures industry in Canada. Years after the fact and in a chat forum nonetheless, you JD (and possibly others) and learning about the circumstances regarding the bly contract. How do you design a new contract without knowing why the previous ones failed ?

The process has to change. Those responsible for the new contracts don't have the expertise that is needed. Get people from outside the "old boys club" so the contracts will not be so biased. This past generation of "grain traders" have failed farmers. It is almost embarrassing to have witnessed it.

[jdepape]

Not to sound defensive, but I do get it. I even mentioned it above - their problem was rolling their large position through a carry that was at times wider than what you and I would consider to be full carry.

And I know what you are saying about position limits. But what you are missing is that if a spec reported to the exchange that it wanted to stay longer than their spec limit because it was planning on standing for delivery at full carry or wider, under the right circumstances, the exchange would consider that non-speculative (because they had a profitable sale in the deferred).

Also - in the spirit of full disclosure - I was in informal discussions with the exchange at the time on a number of issue, including spec limits. I shared my view that, although spec limits are a necessary evil to hinder market squeezes, it also reduces liquidity. We talked about how spreads were going wider than full carry - I suggested they needed to increase spec limits to allow more trade.

However - I maintain that the Fund managers were irresponsible trading the size they did KNOWING FULL WELL what their spec limits were. A more responsible position would have been a smaller position - as I indicated above. That's why I was suggesting to increase spec limits. It was to allow for larger positions which would contribute to liquidity.

It's like someone buying a Ferrari so they could drive really fast only to get a speeding ticket - and then blaming the law that stipulates a slower speed.