WPAC update Pellet Trading A pellet exchange would allow wood pellet manufacturers to insure against unpredictable price changes. By Gordon Murray A PX-ENDEX and Port of Rotterdam are proposing to intro-duce a wood pellet exchange, which should be operation-al by the fourth quarter of 2011. Sipke Veer is the APX-ENDEX product manager in charge of this initiative, and I had an opportunity to meet him recently at his office in Amsterdam. “APX-ENDEX is well known for its gas and power exchanges,” says Veer. “A pellet exchange will extend the range of trading op-portunities that we offer. The Port of Rotterdam knows all the parties who do the physical handling of pellets and will set up the infrastructure to receive, store, and tranship pellets.” Power-generating companies are familiar with trading through exchanges. “They do it all the time with coal, gas, and power,” says Veer. “In fact, the power utilities were the origi-nal shareholders of the futures side of APX-ENDEX until it was sold it to our current owners. And they like our idea for a pellet exchange. However, we realize it will be something new for some of the pellet producers, and they may initially be hesitant. But once they learn the benefits of participating in an open, liquid, and transparent market, we think they will be enthusiastic participants.” So what exactly is a commodity futures exchange? It is an orga-nized marketplace in which members can freely buy and sell com-modities. The exchange provides the facilities and ground rules for its members to trade in commodity futures, and for non-mem-bers to trade by dealing through a member broker and paying a brokerage commission. The primary distinction between a futures market and a market in which actual commodities are bought and sold for immediate or later delivery is that in the futures mar-ket, one deals in standardized contractual agreements only. These agreements, known as futures contracts, provide for delivery of a specified amount of a particular commodity during a specified future month, but involve no immediate transfer of ownership of the commodity itself. Trading on a commodities futures exchange provides: • Liquidity—the ability to buy or sell a commodity at a posted price; • Price discovery—the ability to observe instantaneous market price; and • Price transparency—the ability to know that the instanta-neous price is fair, in contrast with a bilaterally negotiated price. The more liquid a market is, the truer the instantaneous price and the less the price distortion. The price is what it is; if you disagree, you don’t trade. Modern futures trading started in the grain markets with the establishment of the Chicago Board of Trade in 1848. In the 1870s and 1880s, the New York Coffee, Cotton, and Produce Exchanges were introduced. Today there are major commodities futures ex-changes in more than 20 countries. Each futures market has producers and consumers who need to hedge their risk from future price changes. Speculators, who do not actually deal in the physical commodities, play an important role. They provide liquidity and assume the risks that are hedged. Rather than taking delivery or making delivery, speculators offset their position at some time before the date set for future delivery. If the price moves in the right direction, they profit; if not, they lose. This maintains an orderly market in which price changes are small from one trade to the next. One can buy and sell commodities in a futures market July/August 2011 28 Canadian BIOMASS
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