Should Canadian Agriculture Weigh In On Chicago Futures Exchanges


March 2007 corn futures closed today at $3.90/bushel. March 2007 soybean futures closed over $7.00/bushel. Believe me my friends; there is some rare air wafting around. Markets continue to boil.

As many of you know I take a stab at the market from time to time. Since the summer I’ve been doing the “Market Trends” corn commentary and podcast for the Ontario Corn Producers Association. Next month I’ll be doing the market outlook session at the South West Agricultural Conference at the Ridgetown Campus of the University of Guelph. So market navel gazing is increasingly part of my journalistic career.

Every day I look at the DTN futures pages just like many of you. Over the years I’ve written many things about these markets. Some of it is about what’s behind those flickering quotes. I was reminded of that last week when I read an article from an American agricultural journalist, Alan Guebert. His article “Silence of the lambs greets mega futures deal” documents recent “goings on” in Chicago futures exchanges and the relative silence of American agriculture.

What he was referring to was the purchase of the Chicago Board of Trade by the rival Chicago Mercantile Exchange, which was announced last October 17th. I was in the middle of a wet fall harvest when I heard the news. I knew what should cause shivers within our agricultural industry would probably only resonate within my own agricultural noggin. I’ve never been comfortable with Canadian agriculture being totally dependent on price discovery from Chicago. Rationalizing it even more would seem none to wise.

Geubert goes even further. He says and I quote, “Golly, there’s a marriage between the world’s biggest, most active corn, soybean and food ingredient price setter (the Cbot) to the world’s biggest hog, bacon, feeder cattle, fat cattle and cheese price setter in the world (the CME) and the American Farm Bureau, the National Corn Growers, the American soybean Association, the National Cattlemen’s Beef Association and the National Pork Producers Council cannot even cough up one burp or press release between them.”

In Canada the reaction is clearly muted just as much as or even more so than in the US. In some ways it is understandable. In some ways it almost makes more sense than the reaction down south. However, it probably isn’t right. For whatever reason in this country “price discovery” is seen as a “Chicago phenomena” which we cannot do anything about. In my younger days I called that an avowal of failure. Now I’m more charitable. However, we won’t have much right to complain if there is another scandal Vis a Vis Feruzzi. There has been nothing major go wrong at the commodity exchanges lately, but history repeats itself and surely sometime in the future there could be another “Feruzzi” type emergency order sending commodity markets in unnatural directions. And somebody in Canada needs to be watching.

I say some of this is understandable because price discovery and the inner workings of both financial and commodity markets are difficult to understand. When you are programmed all your life to watch the markets, I don’t think we ever think twice that those flickering quotes having rules, which must be respected. In the case of the CME and CboT getting together, rules surely are being respected. However, with trillions of dollars being exchanged between them such a merger affecting Canada shouldn’t go unnoticed.

Keep in mind futures markets are all about managing risk. There would be no grain movement without a viable futures arena. However, no futures market operates in a vacuum. There are rules. The Commodity Futures Trading Commission in Washington D.C. regulates US futures markets. This takeover plus the current gold rush environment surrounding ethanol will surely challenge them. Keeping the markets “true” will surely be their greatest challenge.

There may be some of you who believe the price discovery mechanisms at Chicago to be corrupt. This latest takeover event will surely reinforce that view with some. However, remember what I’ve always said. Regardless of how you feel abut the “market”, in the end the market is always right. Those holding old crop corn on the Sept 12th 2006 know that for sure. Corn futures finished at $2.37 that day. Now, 78 days later December futures finished at $3.77. That’s a $1.40 difference. Yes, sometimes the market will simply kill you.

I’m sure all of you remember my sheep story. That found me in Australia musing with another agricultural economist about wild fluctuations in local sheep prices at different markets within the Australian countryside. He was charged with fixing it. In the end those markets had volume problems and a little bit of hocus-pocus. That’s exactly what we don’t want in Chicago. No I’m not saying its happening. However, when two huge futures exchanges come together in a takeover, Canadian agricultural need to weigh in. Nothing affects us more. Saying boo would be a start. I’d be glad to get the ball rolling.