Flax Futures died yesterday - Long Live Flax

[Incognito]

U know, in the 80's the Hon. O.E. Lang told me that the world population is such that it will become "ravenous" and we were one production problem away from $6.00 wheat.

I, like many others, have been waiting patiently for that day.

[charliep]

Just a note there is a limit to how far you can push commodity prices for crops Canada plays a dominant role.

We have seen 60 cent/pound plus yellow mustard prices in a shortage year. This year saw a shift in demand to other types of meat binder and condiments or at least ways of stetching the limited supplies that were available.

The shifts are away from oils based paints and new substitutes for linoil.

Years of high durum prices have seen/would see shifts to non traditional growing regions. Lower end pasta products (i.e macaroni) can use regular wheat.

If there isn't a demand for the processed product, there likely isn't a need for the commodity that goes into it.

[Incognito]

Grasshopper:

Flax is loaded with more omega-3 than any other plant on the planet.

120 Flax capsules is worth 2X the price of a gallon of paint.

All the flax that is leaving western Canada in containers is not being converted into paint and linseed oil. The demand has not shrunk, it has shifted.

The parable of the three monkeys:

If it doesnt leave Thunder Bay or Vancouver and the CGC didnt see it, it must be still on the farm.

Mustard:

For the past 3 years, the main mustard seller(prepared mustard) in Canada (En français) has not raised prices. At what point does the 72 cent yellow mustard from 2002 impact their selling price, if ever?

[chaffmeister]

Sorry for the length – but there’s a lot going on here.

So flax won’t make it on the new electronic board, eh? My guess is that this time next year we’ll be wondering why they didn’t go electronic sooner. Don’t listen to the floor traders when they say that without them, the exchange will die. Not only will they be replaced, but they’ll be replaced with volume. You may be right about flax dying – but going electronic won’t be what killed the flax contract.

Futures contracts die from lack of use – basically, like a muscle that hasn’t been used, they atrophy. If you’re going to say that “they” killed it, toss your net a little wider. Those with an interest in flax – including producers – that didn’t use the contract, are the ones who may have killed it. Assuming the commercials are the “they” you refer to, “they” didn’t kill the contract from not trading it – “they” are virtually the only ones trading it in the last decade or more. The fact that others didn’t trade it, simply allowed “them” to abuse the contract. And they didn’t abuse the market because they wanted it to die – they did it because they could and they could make money doing it.

The abuse of the flax futures market occurred at a time when the compliance dept of the exchange was lax. You say the MSC is a puppet – look a little closer. The WCE itself was known as the “toothless tiger” not that long ago. Today, traders complain bitterly about the WCE compliance dept; a decade or more ago, they’d go for beers with each other. In another thread, the new board was featured. Heavily skewed toward FCM’s and outside interests (only 4 commercials on the board), the current WCE is set to act in the interests of ALL participants, particularly the non-shareholders. The commercials no longer rule the roost. These are all good changes – electronic trading, new players, committed compliance, a “public” board – but for some reason, I don’t see anyone getting excited about them. Instead, all I see here is ranting about how bad things are and it’s all “their” fault.

Interesting comment on canola basis: “we are seeing canola basis fluctuate to attract seed as if the futures were not/will not work/working”. First off, basis is supposed to fluctuate to attract seed – I’d worry if it didn’t. But, assuming you’re saying the futures are not working, are you saying this is because “they” don’t want it to work? Or is it not working because “they” aren’t using it? If so, you’d need something like larger trading margins to support the logic (like what I think you are suggesting in flax). Are they?

Your synopsis of the flax market is interesting. I am so far away from it I really can’t comment. But before I go slit my wrists over it, I would certainly want the answers to some fairly simple questions:

Is the EU price you quoted, a bid, an offer, a trade, or an indication? Flax and linseed oil are two small and often very thin markets. Often nothing is going on – no buying, no selling – in that situation, when a trader is pushed for an offer for publication, you can be sure it’ll be a high one.

If it’s a bid, is it from a processor (end user) or from a reseller (trader)? It can make a huge difference. A reseller will take the market to the moon to cover a commitment, whereas a processor can simply shut the doors before taking on too much pain. Is there a structural reason why a resller would bid for flax in EU much higher than in Cda?

If flax is worth $500 a tonne to someone in the EU, but the best bid in the country is $8.50 a bu, or about $335 per tonne, that leaves about $165 to move it. This means there’s about $120 for ocean freight and let'S call it, bonus margins. I don’t know what current ocean rates are but I’m sure they aren’t over $100 a tonne. If all this is true, there’s a lot of bonus margin in there. Know a good broker? For that kind of money, you could easily go around the “they” and spread some Christmas cheer to a few flax farmers out there, while keeping a little for your time. I must be missing something – someone should be picking up that ball and running with it. If not, heads should roll. Unless of course this is simply the basis for a conspiracy theory.

Now mustard. 72 cent yellow mustard in 2002 wouldn’t impact French’s retail prices because (I’m gonna go out on a limb here) they never paid 72 cents for it. If things haven’t changed, the vast majority of mustard is forward contracted by processors. The price risk is worn by the commercials. What they don’t cover with producers, they buy-in after the fact, in the cash market. And if there’s a crop problem, they pay dearly, because Mr. French wants his mustard and he doesn’t care what it costs the reseller. So the reseller or commercial may pay farmers 2 or 3x the actual selling price to French’s. I doubt French’s or any other major user has ever paid 72 cents. But maybe things have changed….

Seems to me you got a mad-on for something, Incognito. I like Boone’s idea. Sleep on it. I find a couple of rusty nails go a long way to soothe my ruffled feathers.

[Incognito]

USD$540 March 15- April 15. Want paper? I'll fax it to you. Flax is $11.00 in the country elevator system. And this is a direct quote from a former Flax trader who is now in Brazil:"Why would we ever want price discovery for flax and for that matter canola"
You are right, you are too far removed to comment on Flax. But next time you are in the concourse, check around to see how many flax traders are still at their desk.

Canola basis fluctuating $20.00 at the same location, within 3 days is normal I guess. That and starting Monday, flat pricing will be the order of the day. You might want to throw that net real wide and do some soul searching.

Mustard:

The vast majority of mustard is forward contracted by processors. The price risk is worn by the commercials. What they don’t cover with producers, they buy-in after the fact, in the cash market. And if there’s a crop problem, they pay dearly.

80 -86% of the mustard grown is forward contracted. The majority of mustard contracts with end-users have percentage roll-back clauses in the event of crop problems. Who is at risk?

Conspiracy theory? Look at how far Alberta Agriculture got with theirs. And that was with high-priced help.

[boone]

DING end of round one, go easy gents we are all going for a couple of pops later on. You two are the best info discovery we have don't let the GAME face carry the day. Farmers are treating flax the way they used to treat Canary grow a little each year and wait for the big score,brown,yellow mustard as well, it creates ingestion problems, go easy nothing below the belt, mouthguards in. ding round two.

[Braveheart]

Chaffmeister, I agree with your assessment re the WCE, the canola basis and flax. I think one of the most important points you touched on was personal responsibility.

For instance, last year's canola basis was very weak. Producers blamed the design of the canola contract, greedy grain merchants and everyone else they could think of. Really though, the main contributor to the weak basis was the number of farmers that were willing sellers. Futures prices were strong, street prices reasonable, and farmers were squeezed for cash and willingly sold into weak basis. The basis didn't have to strengthen to attract seed.

Many farmers don't make and stick to a marketing plan. Most farmers still don't use the price risk management tools that exist through the WCE or elsewhere. Just as importantly, farmers don't take responsibility for their own contributions to the marketplace.

This is ultimately what happened to flax. Farmers quit being hedgers and that left just a few larger players.

There will always be participants in every marketplace that will seek to be dominant. As producers, whether we market our cattle, hogs, grain, whatever, it is our responsibility to care enough to not let ourselves be dominated.

[melvill]

Braveheart, I agree with you that it is basic human nature to find someone else, other than ourselves, to blame when times are difficult.

However, given that, I do think that weak (wide) canola basis levels last year may have been partly the result of WCE contract design. In my opinion, delivery against canola futures is so cumbersome and fraught complications, that futures delivery can't be used to discipline either basis or futures prices. That's why it was my argument that we had weak basis levels last year because futures were too high, not cash too low. Perhaps futures were too high because delivery against futures is nigh unto impossible, or at least improbable, particularly for producers. Maybe we need a cash settled canola price index something like what the MGE is offering for its wheat (and other) contracts.

[Braveheart]

Melville, I was never a fan of the WCE canola contract design. When the contract moved to interior pricing and par and non par regions it seemed that producers in the eastern prairies (where I farm)were faced with weaker basis levels than was experienced with the previous contract. It took a long time for our farm to adjust to this reality but we are learning (slowly) that when good basis levels are offered, we must be aggressive and decisive in locking them in.

The way different firms manage risk is also changing. There are fewer commercials, but they are larger, can probably manage their risk internally or with flat back to back pricing. There is more fund money looking for investment vehicles. All these factors change the volatility of commodity futures markets. Will futures and cash converge daily? On a weekly basis futures and cash likely will converge. The participants are changing lately as is the marketplace (IP canolas, wild currency swings, terrorist threats) and producers must adapt.

Would a different delivery mechanism allow for better convergence? Would it discipline futures and cash prices? Or would a simpler delivery process result in grain stocks that had no end sale entering the elevator system and congesting it?

I haven't really thought of the delivery process as "overly" onerus, I just don't know why anyone would want to do it.

My experience with the WCE was that if anyone brought forward changes needed and made an argument supported with facts (technical, stats, etc.) it was given fair consideration. Delivery against futures is often griped about in coffee shops and at marketing club meetings, but is usually repeated by people who heard someone else gripe about it, and they really don't understand it.

[melvill]

You said, "When the contract moved to interior pricing and par and non par regions it seemed that producers in the eastern prairies (where I farm)were faced with weaker basis levels than was experienced with the previous contract."

And you said, " haven't really thought of the delivery process as "overly" onerus, I just don't know why anyone would want to do it."

Perhaps, unknowingly you answered your question about not knowing why anyone would want to deliver against futures with the first couple of sentences in your post.

I think you're right about not wanting to deliver against futures in 98 or 99% of the time. However, it is times like you talked about in your opening paragraph that makes one wonder if easier delivery against futures would be useful. I'm not saying "easy as starting the auger motor" easy for anyone other that commercials, but at least easier than it is now.

If one looks at the canola deliveries for Nov 04 on the WCE web site, the list is heavily weighted toward commercials on one or both sides. It's even worse for feed wheat and western barley for the Dec contract.

[Braveheart]

The warrant system isn't overly onerus. What would be onerus would be the maximum tariffs I'd be faced with if I showed up at a nominated delivery point with the canola. That being said it is obviously easier for a commercial with stocks instore to stand for delivery than a prairie farmer to fire up a truck and try to squeeze grain into someone else's facility.

When it comes to threat of delivery against futures of course it is useful for proper function of a futures market. Does it matter though who can most easily use that threat?

I'm surprised that there are a lot of deliveries right now? What does that signal to you? Last year when there was a lot of money to made by delivering, few commercials did and a lot of money was left on the table.

[Incognito]

Just wondering if low canola oil content and ocean freight that doubled had anything to do with high basis levels on sales that were sold 3-6 months out before oil content and freight was a known entity.

It seems to have been missed in the above.