Economics and Marketing: Choosing a Commodity Broker

This is an updated fact sheet from the Economics and Marketing section of the Alberta Feedlot Management Guide, Second Edition published September 2000. The 1200 page guide is available for purchase on CD-ROM.

Introduction

Farm managers plan to use futures and options as part of their marketing plan must use a commodity broker to buy and sell their futures and options. An experienced broker, also known as a Futures Commission Merchant (FCM), like a market advisor or accountant, can be a very valuable asset to the farm manager.

Step One in choosing a FCM is deciding what kind of service is needed. Some farm managers want a broker whose firm provides market background and outlook information. Other farmers don’t need that because they get their market information from other sources.

Step Two in choosing a broker involves talking to several firms and their brokers either by phone or in person. Talking to several firms helps you choose the firm based on each firm’s required financial conditions and level of service. Talking to more than one broker at each firm helps you choose a broker you are comfortable with on a personal level, which is also important.

Some firms have several FCMs in their offices. Often each FCM has a different area of interest. Some deal mostly in industrial commodities or financial futures. Others concentrate mostly on agricultural commodities. FCMs, also, tend to have an interest in either hedge* accounts or in spec business*.

Client Protection

FCMs, who accept futures and options trade orders on behalf of Alberta farmers, must be registered with the Alberta Securities Commission or with the Investment Dealers Association. In some cases, an FCM is registered with both. These registrations require that each FCM follow certain accounting standards and procedural practices and that the firm is financially secure. Each firm must file quarterly and annual financial statements. A chartered accounting firm also audits each firm annually.

Introducing and clearing brokers
There are two types of FCM firms - clearing or carrying brokers and introducing brokers. A clearing or carrying broker’s firm has purchased the right to trade on the various commodity exchanges. That means the firm’s own traders carry out futures and options buy and sell orders on
behalf of customers.

An introducing broker takes futures and options orders from customers and relays them to a clearing firm to have the orders filled at the exchanges.

The clearing broker also handles all the required bookkeeping including margin accounts and margin calls. If an introducing broker goes out of business, the clearing broker handles customer futures and options positions. There are very few introducing brokers still in operation.

How trades are carried out
On behalf of a farm manager, an FCM with a clearing firm may either submit a trade through the firm’s trading software system or phone the order to the brokerage house order desk. An introducing broker will transmit trades through the head office of his or her clearing broker. In either case, an order is filled immediately if the order is placed “at-the-market”. See the Agricultural Marketing Glossary at http://www1.agric.gov.ab.ca/$Department/deptdocs.nsf/all/sis9491 for definitions of at-the-market and other marketing terms.

Trading at the Winnipeg Commodity Exchange is only done on an electronic platform based at the Chicago Board of Trade electronic system. FCMs enter trade orders directly into the CBOT electronic trading system for WCE canola, Western Barley and domestic feed wheat. However, at the Chicago Board of Trade and the Chicago Merchantile Exchange, there is side-by-side electronic and a pit trading for the time being. There are also electronic-only overnight trading sessions available for both CBOT and WCE grains. CME Feeder Cattle futures, on the other hand, trade during the same day-time hours for both the electronic system and in the trading pits, but there is no overnight electronic session.

Customers, wanting to trade at exchanges where there is both electronic and pits trades have the choice of where they want their trade executed. Normally, FCMs will place orders on the electronic system unless customers specifically dictate they want their trade in the pit.

Pit, or open-outcry trading, is gradually being phased out by most commodity exchanges. It is being replaced by electronic trading as the amount of pit trading decreases.

Client Financial Requirements

FCMs often require their customers to meet certain financial conditions before the firm will agree to fill futures or options contract orders. Farms may be required to have a certain minimum gross income or net worth. A minimum operating line of credit or bank cash deposit may also be required. These conditions are in effect to protect FCMs from clients who are not serious or are in financial trouble.

Some of these guidelines may be reduced or waived under certain conditions especially for clients who only plan to hedge in their trading accounts.

Farm managers, who are talking to prospective FCMs, should ask for details of each firm’s client financial requirements before choosing to use a firm’s services.

Futures Commission Merchants Registered to Operate in Alberta

Below, in alphabetical order, is a list of all the FCMs the author could find registered to operate in Alberta as of May, 2008. Details of each firm’s services and financial requirements will vary. It is important for producers to ask for those details before opening a trading account.

Chinook Agri Marketing, Inc.
Box 910,
Didsbury, AB T0M 0W0
Brokers: Bill Blakely
Phone: 800-661-9690 (toll free)
403-335-3056

Commodity Management, Inc.
Note: Effective February 29, 2008, Commodity Management, Inc. merged with RBC Dominion Securities, Inc., in Edmonton. Please see RBC Dominion, Inc., Edmonton, below.

FCStone Canada, Ltd.
#103, 90 Garry St.
Winnipeg, MB R3C 4H1
Brokers: Craig Hamanishi, Bob Rogers
Phone: 866-634-7392 (toll tree)
Web: www.fcstone.com
E-mail: craigh@fcstone.com, brogers@fcstone.com
Note: FCStone only handles hedge and business replacement trades for farms, not purely speculative trades.

Newedge Group
#2220, 700 9th Ave. SW
Calgary, AB T2P 3V4
Brokers: Alex Lacrois, Stephen Fiorini, Patrick Lampman
Phone: Grains Group - 403-206-9030
Web: www.newedgegroup.com
Note: Newedge Group is a joint venture of FIMAT Derivatives and Calyon Financials. Newedge Group only handles futures and options orders for very large farms and for commercial and institutional accounts.

MF Global Canada
#4 Thorncliff Crescent NW
Calgary, AB T2P 3A9
Brokers: Errol Anderson, John Dale
Phone: 888-216-2490 (toll tree)
403-216-2490

MF Global Canada
#2050, 300 5th Ave. SW
Calgary, AB T2P 3C4
Brokers: Dale Cockx (Branch Manager), Bob Horobin, Bruce Groberman, Scott Cockx, Alex Groberman, Rob Gigiel, Frank Kelton
Phone: 888-447-3326 (toll free)
403-264-8690

RBC Dominion Securities, Inc.
2400 Oxford Tower
10235 101 St
Edmonton, AB T5J 2K8
Brokers: Robert Haug, Allen Wigelsworth
Phone: 888-493-7707 (toll free)
780-493-7707
E-mail: robert.haug@rbc.com, allen.wigelsworth@rbc.com

RBC Dominion Securities, Inc.
Suite 1400, Dome Tower
333 7th Ave SW
Calgary, AB T2R 2Z1
Brokers: Steve Walker
Phone: Direct – 403-266-9668
Switchboard – 800-310-9668 (toll free)

Scotia Capital, Inc.
#300, 119 6th Ave. SW
Calgary, AB T2P 0P8
Brokers: Frank Windsor, Nick Cooper
Phone: 877-353-8055 (toll free)
403-213-7351

Union Securities, Ltd.
#1520, 360 Main Street
Winnipeg, MB R3C 3Z3
Brokers: Ken Ball, George Hollo, David Derwin
Phone: 800-661-0298 (toll free)
Brokers: Richard Cook (Branch Manager), Dave Parrish, Rene Dansereau, Gary Ng, AJ Tooley
Phone: 866-752-0367 (toll free)
Phone: Switchboard - 204-987-7220
Web: www.unionsecuritiescommodityfutures.com/

Union Securities, Ltd.
#1000, 102A Ave
Edmonton, AB T5J 2Z2
Brokers: James Cettiga, Earl Gartner
Phone: 877-413-3344 (toll free)
780-413-3344

Good Brokers:

• understand farming and what a farm manager is trying to accomplish by hedging*.
• are knowledgeable about the markets without being overwhelming or overbearing.
• keep their clients informed about the market and the conditions of their accounts and futures and options contracts.
• do not pressure clients, who are primarily interested in hedging, to speculate.
• do have good personal contacts in the marketplace for agricultural commodities. Contacts sometimes provide background information on market news that is not otherwise readily available.
• do not necessarily offer the lowest commissions. Generally, commissions are not a high-cost item. Compare all services offered by various companies before choosing a firm based on low commission.
• do not pressure clients to allow churning* of accounts.