Flax Futures died yesterday - Long Live Flax

[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.

[chaffmeister]

This is now a little out of sync with the thread - cuz I'm late responding....

Thanks Boone for letting me know that I had stepped into the ring. Incognito, it’s tough to read the mood or tone in a written word sometimes and I guess I misjudged your sensitivity about this stuff.

I’m not at all surprised that a flax trader questioned why a commercial would want price discovery. But in a volatile market they need something to manage their risk between buying and selling. Futures are kind of a double edged sword (price discovery and risk transference) and the commercial may be interested in only one side. Without a tool like futures, they simply must widen margins to protect from the times that the market simply gets away from them. And that’s what I’m told (by a few key sources) is happening in flax. High volatility cuz of short crop and lousy harvest, etc., no flax futures to manage risk and bang – you gotta widen your margins to take care of business. In essence, flax has become a special crop.

Without futures, the level of volatility will dictate the level of protection placed within the margin. In essence, you’ve addressed your own concern/complaint about the market. Big spread above costs between CIF and farm gate suggests huge volatility in the market. And that is exactly as you described the cash market. From what I’ve been told and what you have said, I would say the flax market is working as it should be expected to – considering the futures contract doesn’t work. You’ve just built the argument why everyone – commercials included – have a responsibility to support a futures contract.

This flax trader you’re talking about – didn’t he up-and-leave out of frustration trying to cover his export book (prior to being fired, perhaps), leaving a lot of corporate blood on the floor for others to clean up? Getting big-time short ahead of a volatile weather market with crappy harvest leading to a tight s/d is not for the weak of heart, particularly without futures to help. Wonder how he would have fared had the flax contract been viable? Without futures, it’s just not safe to put on the big export programs like we used to in the old days.

So let’s see – the commercials killed the flax futures to remove price discovery from farmers’ eyes. This allows them to widen the basis. (Didn’t you say “they” killed the flax contract “Because they don't want farmers to know what the price of Flax is/was/will be”?) But then two flax traders with major exporters quit their jobs allegedly leaving big messes and big losses in their flax accounts. So where was the gain from the wide basis? Shouldn’t they be reaping huge profits at the expense of the farmer? And this is all happening in an environment when these firms have much less appetite for risk than I have ever seen in 25 years of trading.

So remind me again why they would think it’s a good idea to kill the contract?

Futures contracts will be used by each participant to their greatest perceived benefit. If because of low futures liquidity, a firm has less risk doing back-to-back cash business, they’ll do that. With high liquidity, the same firm will be an efficient hedger. It’s not that they choose to kill the contract so they can hide prices – it’s a matter of cost, and lower risk means lower cost. When the futures market presents greater risk because of low liquidity, it makes sense for them to avoid it. It’s up to the whole flax community to make sure it works so that it is the low cost (low risk) alternative.

Which would you do: trade in a cash market that you move $5 per tonne to cover a short, or trade in a futures contract that you move $20 per tonne to buy the same volume?

Viable futures allow the commercial to take on more business – because the risk is lower and easier to manage than without. If you’re limited to what volumes you can do because of high risk, everyone loses as markets are much slower to develop and harder to maintain. Yes, commercials may say they don’t need price discovery but a commercial who would say he can do better in a large market without a viable futures contract is an idiot. (I don't mean you Incognito, I mean the commercial.)

Not sure at all what you are thinking about when you tell me to do some soul searching. Perhaps another time. Over a beer. With Boone as ref.

[Incognito]

Chaff:

Its sometimes easy to let passion get in the way of sensitivity. Its much easier at 5:30 a.m. after a vitriol exchange (pun intended) with some oarsman thinking that his ship has come in.

Ask Boone. We've both been on the receiving end of some good whacks.

I'll get to the rest of the reply when my 20-month old isnt tugging at the comp. wanting to watch Bob The Builder with his Dad.

Best,

[boone]

" WE HAVE MET THE ENEMY..............
AND HE IS US"
-Pogo

[chaffmeister]

Does this mean we're not going for those beers?

[boone]

No Chaff we'll definitely go for the brew,I was speaking of each and every players stilted behaviour in the smooth marketing flow, farmers grow it bin it and want to enjoy it. They market when their hungry, guess what we all get hunger pangs at the same time. I think as we rationalize farming it may change. Buut and it's a big one. It used to be the large farmer were the ones that could carry out and build a market, not so anymore. I see producers with big acres, and big input carry, market like hyena's. They discover little for themselves but when slaughter has started they chase it right to the ground. Anyway on that cheerful note Merry Christmas to any and all participants and voyeurs alike. May God bless everyone to the limit of their wishes. Boone

[melvill]

Hey Chaffmeister, you're right about flax becoming a "special crop", 'cause it has. Same as rye and you remember what happened to rye futures. And let's face it, durum is a special crop, too, and notice what happened to durum futures at the MGE.

Someone said something like 'we have met the enemy and he is us.' And I at least partly agree with that. I teach two or three eight-day grain and oilseed marketing courses each year using a neat little tool developed by Alta. Ag. called FutureSim 3 (shameless plug for a good tool). (My colleagues teach another two or three or more.) The participants are attentive and eager to learn but, and I'm only guessing, only about 10%, at the high end, actually go out and open a futures trading account. And then probably half of those let it sit unused. So it isn't just commercials who don't always support the WCE. It's primary producers, too. Now the flax growers that I talk to are lamenting the possible end of flax futures. They didn't use flax futures directly but they sure liked to watch future's public price discovery.

Now, has anyone got any really good ideas how I can motivate my clients to become more involved and proactive in using existing marketing tools before more of them disappear?