Canada Markets

Italy's Borsa Italiana, which is controlled by the London Stock Exchange, launched the trade of Europe's first durum futures contract today. While this has been long-awaited in Europe, this is not the first attempt at a durum futures contract.

North American durum growers have long lacked the market transparency and ability to mitigate risk through the trade of a liquid and actively trading futures market. The Minneapolis Grain Exchange (MGEX) first launched a North American solution on Feb. 12, 1998, which ceased to trade on March 20, 2003. In July 2000, contract specifications were adjusted in an effort to attract producer volume. It was suggested that quality parameters surrounding the contract specifications downloaded additional risks to the producer, whose unwillingness to trade ultimately lead to the demise of the contract.

The next North American solution did not take place until January 2012, when the ICE Canada Exchange introduced a durum contract to meet the needs of producers within the deregulated marketing environment in Canada which began on Aug. 1, 2012. Market risk management had previously not been an issue from the producer's standpoint, with the Canadian Wheat Board marketing monopoly in place since 1942.

Trade in the newly-created Canadian futures began Jan. 23, 2012 with the trade of the October 2012 future along with subsequent trading months, with the fully deregulated environment to begin the following Aug. 1. In the Jan. 23 press release from the ICE Exchange, Terry James, Vice President of Export Marketing for Richardson International, pointed towards his company's eagerness to have a home-grown, Canadian dollar solution to durum risk management, stating that they had placed orders during the overnight trade on the evening of Jan. 22.

The ICE Exchange has developed a future with par-delivery facilities in south-western Saskatchewan, which provides flexibility in terms of movement east, west, or south into the United States, as a means of having the best chance of survival. Unfortunately, the future has failed to gain traction this crop year, with total open-interest currently at 31 contracts (3100 metric tonnes), all in the nearby March contract.

In an interview with Reuters, Brad Vannan, President and Chief Operating Officer of ICE Canada, suggested it is far too early to write off the notion of a successful Canadian durum future. "For people to see value in those tools, they have to perceive risk." 2012/13 has been viewed as an "unusual year", with escalating grain prices because of the U.S. drought creating attractive marketing opportunities in the cash market and with strong North American feed demand placing a floor under wheat which has acted to shelter durum from volatility. Since Aug. 1, DTN's National Durum Index indicates a U.S. cash market low of $7.53/bu., a high of $8.24/bu., while the mean is shown at $7.93/bu. Vannan suggested the contract may require an additional crop year to build volume, and perhaps even several.

The Italian contract is designed primarily around European supplies of durum for movement into the milling and pasta-making industry within Italy. Italy is viewed as the world's largest producer and per-capita consumer of durum. The contract trades in 50 metric tonne quantities and in euros per metric tonne. One single delivery point has been named near Foggia, in southern Italy.

Few concerns arise surrounding the Italian contract's ability to reduce trade in Canada's ICE contracts. Arbitrage opportunities will be limited, given the differences in both the delivery points as well as contract quality. ICE Canada's contract is for a much higher quality -- 80 kg/hl versus 76 kg/hl in Italy, 12.5% protein versus minimum 11.5% protein in Italy, 80% hard vitreous kernels on the ICE contract versus a minimum 62% minimum for vitreous grains on the Italian contract.

Today's session resulted in the trade of 16 contracts across five contract months through to March 2014. March and May 2013 futures closed at EUR 299/mt, while new crop futures ranged from EUR 299.75/mt in September to EUR 303.50/mt for March 2014. (1 Euro = $1.3221 Canadian dollars). One day does not make a market, but today's trade in this market signals the expected sideways trade for durum to continue for some time to come.

Already there exist comments made on an internet site regarding some lack of faith in the ability for this new Italian contract to survive. Concerns exist around the concentration of the European industry, with the two major producers being France and Italy, while few buyers exist within the country of Italy which makes up the bulk of the demand. I have heard similar expressions of concern from within the Western Canadian industry. Lack of trade volume may be a result of a durum miller who uses the contract, but the pasta producer purchasing semolina from the miller that chooses not to hedge using a durum contract. There also exists concern that today's lack of volume, should it continue, will act to deter potential volume into the market.

In their work called Grain Contracting Strategies: The Case of Durum Wheat, from Agribusiness and Applied Economics Report No. 648 S dated September 2009, authors William W. Wilson and Bruce Dahl outline the many risks associated with marketing durum, which is referred to as a special crop from a United States perspective. As compared to other crops, durum suffers from the potential of facing greater price, quality and yield risk as compared to other crops. In addition, they note the lack of tradable futures and the poor correlation to other markets which makes cross-hedging undesirable. Cash contracts were suggested to be written primarily on a nearby basis, with forward contracts done to a lesser degree than other grains, limiting potential marketing opportunities.

While it is far too soon to know what will work and what will not in terms of the two durum futures currently trading, the addition of futures trade can lead to overall reduced volatility and increased certainty with regards to the durum markets. While North American producers will not use the Italian futures, industry will benefit from the trends generated in European trade, which may ultimately provide price discovery signals in Western Canada.

Cliff Jamieson can be reached at cliff.jamieson@telventdtn.com

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