The ICE Futures Canada (formerly WCE) feed wheat futures contract died a quiet death this past week as the life support system was disconnected with the closing out of the last remaining open interest. It was 33 years old, young by most commodity contract standards. Feed wheat will be missed by its last surviving family members, the canola and feed barley contracts, It is predeceased by oats, peas, flax, rye......well, you get the picture, its a sadly repetitive theme.
So what's wrong?
Granted, no one grows feed wheat on purpose. In years of frost we see better volumes, but in most years any volume of feed wheat is hedged in barley as trading volumes are larger and more liquid. The timing of this is unfortunate as ethanol demand for feed wheat could have been a life blood for the commodity exchange's contract. As it was, the basis risk in using the Winnipeg contract as a hedging mechanism carried greater risk than the flat price position. This was a warning sign of impending problems.
Recently the canola contract has been guilty of higher risk in hedging than just staying outright long or short. (Basis risk exceeds flat price risk). Much attention has been given to the influence of fund trading on commodity prices. Have the futures contracts lost touch with the real cash values? I think, without doubt, this is true.
As a young trader in the early 70's I would ask my mentor why the market was up (or down) and his answer was always the same - "More buyers than sellers". (or vice versa). At first this frustrated me but in time I 1) stopped asking the question which was his aim all along I think and 2) started to "get it". It is all about supply and demand.
Unfortunately the demand for speculative profit in the futures contracts exceeds the size and participation of the physical trade (of feed wheat, feed barley and even canola). Confidence in the futures contracts is at an all time low by buyers, sellers and hedgers and the instrument has become the property of the speculator. As traders we always like speculative liquidity but the balance of power has shifted and when the fund speculator goes on to their next favourite instrument to own - natural gas, frozen orange juice or the Euro, the grain commodity markets will revert to the grain industry again. The question is "Will there be anyone left willing to use the commodity futures markets?" "Where is the growth in this vital component of commodity trading and risk transfer?"
I've been pondering this state of the industry for some time now as I read the overly positive (yet misleading) reports of record volumes transacting over the ICE platform and watch the simultaneous struggles of the producers and consumers of these same commodities. The grain companies aren't having any fun or making obscene profits through this period either. It's a high risk/low reward scenario.
Since my early years as a trader I have been a huge fan of the futures market as a risk mitigation instrument. It saddens me to see contracts fail and this once pure and effective mechanism turned into little more than a Las Vegas portal. "Bet on the Packers!" "Buy a canola contract!" (What's a canola? - I don't know, just buy it!).
The futures market will cycle back to our industry at some point in the not too distant future. Volumes will reflect production and consumption. I hope there are still players willing to resurrect the techniques of hedging and forward contracting when that does happen. Price discovery is vital to the marketing process and good futures and cash markets are the cornerstone of the trade.
Sorry to ramble, I hope this makes people think about what they are losing and what problems could lie ahead without healthy, Canadian based futures contracts. Perhaps feed wheat won't die in vain.............
So what's wrong?
Granted, no one grows feed wheat on purpose. In years of frost we see better volumes, but in most years any volume of feed wheat is hedged in barley as trading volumes are larger and more liquid. The timing of this is unfortunate as ethanol demand for feed wheat could have been a life blood for the commodity exchange's contract. As it was, the basis risk in using the Winnipeg contract as a hedging mechanism carried greater risk than the flat price position. This was a warning sign of impending problems.
Recently the canola contract has been guilty of higher risk in hedging than just staying outright long or short. (Basis risk exceeds flat price risk). Much attention has been given to the influence of fund trading on commodity prices. Have the futures contracts lost touch with the real cash values? I think, without doubt, this is true.
As a young trader in the early 70's I would ask my mentor why the market was up (or down) and his answer was always the same - "More buyers than sellers". (or vice versa). At first this frustrated me but in time I 1) stopped asking the question which was his aim all along I think and 2) started to "get it". It is all about supply and demand.
Unfortunately the demand for speculative profit in the futures contracts exceeds the size and participation of the physical trade (of feed wheat, feed barley and even canola). Confidence in the futures contracts is at an all time low by buyers, sellers and hedgers and the instrument has become the property of the speculator. As traders we always like speculative liquidity but the balance of power has shifted and when the fund speculator goes on to their next favourite instrument to own - natural gas, frozen orange juice or the Euro, the grain commodity markets will revert to the grain industry again. The question is "Will there be anyone left willing to use the commodity futures markets?" "Where is the growth in this vital component of commodity trading and risk transfer?"
I've been pondering this state of the industry for some time now as I read the overly positive (yet misleading) reports of record volumes transacting over the ICE platform and watch the simultaneous struggles of the producers and consumers of these same commodities. The grain companies aren't having any fun or making obscene profits through this period either. It's a high risk/low reward scenario.
Since my early years as a trader I have been a huge fan of the futures market as a risk mitigation instrument. It saddens me to see contracts fail and this once pure and effective mechanism turned into little more than a Las Vegas portal. "Bet on the Packers!" "Buy a canola contract!" (What's a canola? - I don't know, just buy it!).
The futures market will cycle back to our industry at some point in the not too distant future. Volumes will reflect production and consumption. I hope there are still players willing to resurrect the techniques of hedging and forward contracting when that does happen. Price discovery is vital to the marketing process and good futures and cash markets are the cornerstone of the trade.
Sorry to ramble, I hope this makes people think about what they are losing and what problems could lie ahead without healthy, Canadian based futures contracts. Perhaps feed wheat won't die in vain.............
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