December 13, 2012 / 4:13 PM / 5 years ago

ICE Canada plows ahead with grain contracts after 'unusual' year

* New wheat, durum, barley contracts little used

* Steady, high prices left risk management appetite lower

By Rod Nickel

WINNIPEG, Manitoba, Dec 13 (Reuters) - ICE Futures Canada plans to continue offering its seldom traded Canadian grain futures contracts, confident that a set of unusual, but temporary, market conditions prevented them from taking off this year.

ICE Canada launched milling wheat , durum and barley contracts in January to capitalize on the Canadian government’s removal of Western Canada’s grain marketing monopoly.

But instead of seeing price volatility that would spur the trade to aggressively manage their risk, wheat prices have been high and relatively steady, with fluid grain movement from farms through the commercial handling system -- all in a year in which western farmers gained the ability to sell their grain to any buyer.

”From a farmer’s eyes, what more do you want?“ said Brad Vannan, president and chief operating officer of ICE Futures Canada, an arm of the Atlanta-based IntercontinentalExchange Inc , in an interview with Reuters. ”For people to see value in those tools, they have to perceive risk.

“There are a lot of unusual things that are happening right now, none of which really demonstrate the value of the futures contracts that were built.”

In Western Canada, high prices of wheat for livestock feed - the lowest-value wheat grade - put a high floor price into the wheat market, while an abundance of high-protein wheat kept the ceiling low, Vannan said.

Feedback from the commercial grain trade is that the contracts are well-structured, and de-listing them would be premature, Vannan said. They need at least another full crop cycle, and maybe several, to prove themselves, he said.

“All we need to do is attract more volume. The volumes aren’t great, which is disappointing, but at the same time we’ve seen some small but significant milestones.”

The new contracts have rolled through delivery months, with traders making deliveries and inter-month spread trades.

Open interest, however, is a paltry 83 positions in the three contracts combined, compared with about 155,000 in ICE Canada’s signature canola contract .

CWB, the grain marketing company formerly known as the Wheat Board, has not used the ICE wheat contracts yet, as it waits for liquidity to build, said Chris Palmer, a trader at CWB.

”It’s pretty hard to get new contracts going. The pie is only so big. It might be an issue of people going with what they know. The wheat market is pretty well-represented with high-quality (grades) in Minneapolis and medium in Kansas and lower in Chicago.

“They need to find a niche somewhere to drive volume.”

Western Canada’s grain industry has historically used Minneapolis Grain Exchange’s hard red spring wheat contract to manage risk associated with spring wheat and durum production, but the ICE contracts offer the advantages of Canadian currency and delivery points.

Last month, Milan’s Borsa Italiana launched Europe’s first durum futures market to cater to demand from the continent’s Italian-led pasta makers.

ICE is hopeful of convincing end users of wheat, durum and barley, particularly importers of the Canadian crops, to use the contracts, Vannan said.

Earlier this year, IntercontinentalExchange Inc launched grain contracts in the United States to compete with benchmarks traded on the Chicago Board of Trade.

Those contracts have also struggled to attract liquidity.

“It takes awhile for a market to take on its own personality,” Vannan said. “And I don’t think the Canadian market has done that yet because such unique conditions occurred this year.”

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