Total AFET volume increases 28% in Q1

POST REPORTERS

The recent jump in rice prices has spurred trading in 5% white rice contracts on the Agricultural Futures Exchange of Thailand (AFET), raising the volume traded to 6,035 contracts in the first quarter this year, from 1,510 in the same period last year.

According to AFET president Nitus Patrayothin, interest in rice has lifted all activity on the exchange, to an average of 700 to 800 contracts per day, compared with 200 to 300 a year ago.

Last year, the AFET traded 89,966 futures contracts valued at 29.93 billion baht, with 5% white rice accounting for 20,473 contracts, or 23%. Rubber contracts made nearly 75% of overall turnover or 67,219 contracts last year, with tapioca chips and latex the rest.

For the first quarter this year, total volume rose 28% to 25,848 contracts.

Given strong demand in international markets, rubber contracts remained the most active in the period, rising to 19,434 from 17,354 last year.

The increase in rice trade stems in part from eased regulations, under which traders can settle rice contracts in cash or by physical delivery, In the past, only cash settlements were allowed.

Under the new regime, buyers and sellers must declare their intention for delivery to the exchange between 8:30 am and noon of the business day after the last trading day.

For buyers and sellers who did not declare their intention for delivery or whose intentions are not matched, the exchange would close out the positions by cash settlement based on the final settlement price.

Final settlement price is determined by a three-day average of the mid-interval value of the 5% white rice price announced by the Commerce Ministry's Department of Internal Trade plus a quality improvement premium of 0.30 baht a kilogramme.

According to Mr Nitus, rising commodity prices have also attracted more players not directly involved in rice, such as hedge funds and speculators.

Such non-commercial operators represent up to 50% of the daily contracts now being traded in the AFET, with the rest commercial operators.

''We have seen local millers and exporters start actively trading since February, probably because they have a better understanding of how the market could help them offset risk and manage their purchase orders to match appropriate prices,'' said Mr Nitus.

Because of soaring prices over the last few months, several local exporters have faced losses from futures contracts. Worse, many are finding it harder to procure rice to honour contracts due to price speculation and hoarding.

The AFET first began trading futures contracts for natural rubber ribbed smoked sheet No. 3 (RSS3) on May 28, 2004. It added 5% broken white rice on Aug 26, 2004, and premium-grade tapioca starch on March 25, 2005. It plans to start trading 100% Thai Hom Mali Rice Grade B contracts in July this year.

Chaipat Sahasakul, the secretary-general of the Agricultural Futures Trading Commission (AFTC), said rising farm product prices offered a golden opportunity not only for the country's rural poor to earn higher incomes but also could prompt local operators to gain a better understanding of how the futures market mechanism could help them offset their risks.

''The AFET has long been ignored by local millers and exporters as well as investors, despite the fact that the market can provide them with futures prices or price discovery as information to direct their businesses or to manage their risk. Exporters, in addition, can use the futures exchange as a hedging tool to manage their risk,'' said Mr Chaipat.

''Some millers and exporters would be less likely to cry foul over losses (from rice contracts) if they had taken advantage of information from AFET to supplement their decisions.''

According to Mr Chaipat, farm prices are likely to remain strong over the next decade given the lower amount of arable land, a shift to growing more energy crops, and above all climate change.

High rice prices are anticipated over the next two years based on the relatively low global stocks of only 77 million tonnes compared with global demand of 451 million tonnes.

Exports account for only about 30 million tonnes of the global trade in rice.

''We believe that for food security every rice producing country is likely to keep new output in its stockpiles rather than exporting it. But for Thailand this is a golden opportunity [for exports], as our supply is much more than consumption.''

By Bangkok Post On 7 May 2008

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