The proverbial question this January from market analysts are did you sell your 2008 crop on Canada Day?  For our American friends that’s four days before July 4th and in 2008 looking back, that was the time to sell everything, at least on the futures market.  I’ve heard it a few times.  Can’t we talk about something else?

For Canadian producers that might have been the case, but who knew we had to sell the loonie too and buy it back at 77 cents.  Needless to say, nobody knows, and that holds true today.  When I get up to speak in a few weeks at the Western Fair Farm Show in London Ontario, I think I’ll open with a different line.

Looking back at the marketing year, 2008 is history now.  I’ve counseled everybody to put it in the rear view mirror.  However, there is one thing I think we can look back on and re-consider.  Remember the rants last summer about the lack of convergence and arbitrage between futures and basis?  Remember some of our indignation when corn was $7 and some of us couldn’t understand why we had a $1 negative basis?  There was such divergence within the market that “hedging” was difficult.  In fact at a certain point Ontario elevators weren’t offering forward contracts.  Hedging for 2009 and 2010 was almost non-existent.

At the time it was all so difficult to understand.
Simply put, it went against everything we had ever learned about futures and basis.  Traditionally Canadians think about “basis” as a positive above futures.  That all changed when the loonie went above par.  However, now that it is back down again, we have that positive Canadian basis.  It might all be an illusion as a simple conversion will put it into negative US terms, but sometimes illusions are soothing.  That’s what it seems to be.

The reason there was such a diversion between futures and basis came back to one simple fact last year.  End users would not pay the high commodity prices, which were derived last spring and summer.  This was because these prices were driven up because of the undue influence of speculative index and hedge funds or what many call speculators.  You could argue that these end users wouldn’t complain if the same funds drove these prices down, but that’s not the point.  Simply put futures prices were nothing about hedging risk at some future value and delivery point and time period during that time.  Margin call fatigue had taken over and an aura of disbelief took over.  At the time, many Ontario ethanol plants were simply posting “flat prices”, in effect take it or leave it.

So when I look at a flat price of maybe $6.50 for corn when futures were pushing $8, it doesn’t look so bad now.  However, at the time, the disparity didn’t quite add up.  Confidence left agricultural markets and to some extent it has never been totally replaced even at much lower futures prices.  That’s one reason why I was very interested in the news that the CBOT had made a move to limit the number of grain shipping certificates and warehouse receipts that speculators can hold.   The CME, which owns the CBot, has asked federal regulators to get this done.

The thrust behind the CBot move is to limit the number of registered shipping certificates or warehouse receipts that any individual can hold for non-commercial purposes.  This will be for corn, wheat, oats, rice, soybeans, soybean oil, and soybean meal contracts.

The question I have is this the first step to creating an environment where farmers and agri-business can effectively hedge their risks?  Or is it an attempt to keep “legitimate market players” out of the market who don’t have the same pedigree as the rest of us?  Will this affect grain market liquidity in the future?  Or is it simply the right thing to do and will US federal regulators act accordingly?

At January 2009 price levels this might all seem like “ancient history.”  However, now that the smoke has cleared, thinking about our risk management tools needs to take place.  I’ve always been an advocate that Canadian commodity groups and government need to take this seriously too.  However, it never seems to be.  When it comes to futures, hedging, basis, longs, shorts, spreads, etc, it seems eyes glaze over.

New President Barack Obama has quite an economic mess on his hands.  I’m sure hedging at the CBoT is the least of his concerns.  However, keep in mind, a year ago nobody saw either him coming or the economic calamity before us.  Ditto for the commodity explosion of 2008 forcing the decoupling of futures and basis.  So I hope the CME knows what it’s doing with these certificates and warehouse receipts.  I hope hedging and managing risk wins.  Having a market structure which works seamlessly needs to be the goal.  Canadian participation in that process from my perspective would not only be very welcome, but long, long overdue.