Winnipeg wheat futures slip toward demise-trade

WINNIPEG, Manitoba Nov 2 (Reuters) - Feed wheat futures at the Winnipeg Commodity Exchange may soon draw their last breath as liquidity plunges and the few remaining players trading the contract rush to close out positions, traders said.

Open interest in the contract plunged below 1,000 lots this week, with all but 38 positions in the nearby December WWZ7 contract.

"Shut the lights off: it's all over," a trader said, noting feed grain users prefer to hedge their risk with liquid Chicago Board of Trade corn or wheat futures.

"As a hedging tool, it is next to useless," another commercial trader said. "I think that the Chicago wheat contract is a much better hedging tool."

Some traders said it's a sad turn of events for the WCE, which started trading cash wheat when it first formed in 1887. Feed wheat futures began trading in 1974.

Wheat is the latest in a string of contracts to fall out of use at the small Winnipeg exchange, which earlier this year was bought by Atlanta-based IntercontinentalExchange Inc (ICE.N).

Failure to diversify from its mainstay canola futures contract was part of the reason the WCE shopped itself around to outside buyers.

On Oct. 31, open interest in canola was 133,750 contracts and the WCE's barley futures had open interest of 14,747 lots.

Some of the lack of interest in feed wheat stems from it being a small crop produced mainly when frost or excessive rain downgrade milling wheat crops, said Will Hill, WCE president.

"Nobody intentionally grows feed wheat: it's a weather phenomenon," he said.

Canada trades 10 million to 12 million tonnes of barley per year, while feed wheat accounts for about 3 million tonnes of trade, on average, a grain trader explained.

"Having a futures market for a 3-million-tonne demand scenario is pretty difficult," the trader said.

The exchange failed to successfully market the contract to hog producers or to the emerging ethanol sector, which uses feed wheat for Western Canadian plants, another trader said.

Then, consolidation among the largest Canadian grain handlers took out a market player this year when Saskatchewan Wheat Pool bought Agricore United to create Viterra (VT.TO)

"That's reduced us probably below what some would perceive as the critical mass to keep the contract alive," the trader said.

Small "local" speculators provided some liquidity when the contract traded in Winnipeg's open outcry pits, but those players lost interest when the exchange switched to electronic trading in 2004, the trader said.

It's too early to say whether open interest in the contract will completely evaporate, or whether the WCE will delist the contract, said president Hill.

"We're not in the business of listing contracts that people don't want, and we'll let the marketplace speak on that," he said.

Hill said the contract is well-designed, yet market participants choose not to use it.

"Our feedback has been, 'There's a lack of liquidity so we don't use it,'" Hill said. "Well, liquidity comes from people using it, and there's not much the exchange can do to boost liquidity. People have to want to use the contract," he said.