A long time ago I was called to go to Ottawa. In fact it was 20 years ago, so long ago I called myself a very young man. Former Minister of Agriculture Ralph Ferguson helped make the arrangements. At the end of the day I appeared before the House of Commons Standing Committee on Agriculture regarding price manipulation at the Cbot. The Feruzzi emergency order was fresh history.
Fast-forward 20 years. I’m speaking in Alvinston Ontario and there is former Minister of Agriculture Ralph Ferguson in the audience. I’m talking about futures prices in the stratosphere, but I’m also talking about something very unusual. I’m talking about a “decoupling” between cash and futures prices. I’m talking about the days gone by of forward contracting, hedge to arrive contracts and big grain companies with margin call liabilities. Simply put, I’m talking about a brand new world that is a world away from what we’ve become accustomed too. No, it’s not Ferruzi, this time everybody is affected.
Simply put the futures markets for grains as we’ve known them are no more. In fact many of you will surely have tuned April 22nd when the CFTC, (Commodity Futures Trading Commission) held its public meeting in Washington to alley concerns about the futures market as a risk management tool. Or to put it more succinctly, “try to convince the agricultural risk takers of this world, that “what’s broke will not necessarily get fixed, or something like that”.
It’s becoming increasingly obvious to me what’s so obvious to the grain professionals in American farm country. The simple truth is, the futures market in Chicago is broken and is not providing a true sense of the risk apparent in agricultural markets. We’ve seen a complete breakdown in the traditional way we’ve priced grain within the cash market.
That makes it difficult to write and talk about a futures market, which doesn’t necessarily value the risk, which is important to farmers. In Canada we’ve always had a bit of a disconnect with this because of our low loonie and that international border. However, with the loonie close to or above par, its time we took a long look in the proverbial market mirror. Simply put our Canadian price discovery tradition of basis and futures is a shambles.
What you say? I know, some of you must think I’ve finally hit the wall. How can I be saying that when cash prices for soybeans are in the teens and $5 corn seems so yesterday? I know. Talking to farmers now about market improprieties is like paddling a canoe up Niagara Falls. It seems to me nobody in Canada is listening to the growing rumbling down south. Simply put, our American friends get it.
Look at it this way. What does a super sized negative basis really mean to the Ontario farmer? From my perspective it’s what end users in this province are willing to pay. Rightly or wrongly, that’s it. The super sized negative basis is the manifestation of how futures no longer are relevant to the situation. We’ve already said goodbye to forward contracts into fall 2008, 2009 and 2010. We’ve said good-bye to many other forms of grain marketing contracts. In my opinion its simply time for everybody to wake up and say goodbye to this moribund Canadian price discovery system.
We need something truly Canadian with a large dose of American market reality. Let’s just say Tim Horton’s with a dash of Starbucks. I didn’t come up with this myself but my DTN colleagues Darin Newsom and Elaine Kub have written extensively about the DTN Cash Index traded at the Minneapolis Grain Exchange. The contracts traded there are futures but they are futures and basis combined, effectively eliminating the basis risk. A sample link to these quotes are at http://www.mgex.com/quotes.html?page=quote&sym=ICJ8
This makes so much sense. In fact it might even make for better Canadian risk managers, having a futures exchange, which measures the true value of what farmers can tangibly get a hold of. The only wrinkle from a Canadian perspective would be the value of the loonie. Yes, we might be able to have a regional exchange in Canadian dollars, but eventually we’d have to convert to the world’s default currency, the US greenback.
In this great country we have our “made in Canada” agricultural marketing anomalies like the Canadian Wheat Board and our supply management system. However, we always have too much corn and soybeans in the fall and too much wheat in the summer in Ontario. Yes, we have unique marketing risks, which demand a unique Canadian price discovery system. It’s time my friends. What we have now isn’t’ working. The faster everybody gets that, the faster we’ll move onto something much better.