Improving rice markets with futures exchanges
By Jon Fernquest[Introduction | Vocabulary | Article | Reading Questions | Answers]
 |
Today's article continues the developing story of reform in Thailand's rice policy.
Publicly traded futures contracts can be used to hedge and lock in rice prices, providing insurance and price stabilisation to farmers.
Futures markets are transparent and more difficult to manipulate than government policy which is often very untransparent.
Previous articles:
a. Stockpile profits
b. government intervention
Reading Questions
Here are some questions to guide your reading (See answers at end):1. Why is the Thai government going to sell part of its rice stockpile on AFET (as well as other places)?
2. What will be the advantages of using AFET compared to the government's existing pledging programme?
3. What additional commodities might be offered on AFET in the near future?
4. How long have rice futures been traded on AFET?
5. What was the first commodity traded on AFET?
6. What is the latest commodity to be added to AFET?
7. What made AFET inneffective during the Thaksin administration?
8. What were the benefits and costs of the high rice prices (subsidies) offered by the previous administration?
9. What is Vietnam's ranking on international rice markets?
10. What problems is AFET currently suffering from?
Bangkok Post Article: October 27, 2006
Rice from state silos to be traded on AFET
Move to reduce risk, boost market activity PHUSADEE ARUNMASThe Commerce Ministry is set to offer part of its rice and paddy stockpile for trade on the Agricultural Futures Exchange of Thailand (AFET) early next month to reduce its huge rice stock and risk exposure.
The decision was made at the AFET meeting chaired by Commerce Minister Krirk-krai Jirapaet yesterday.
A working group, with representatives from the AFET, the Rice Policy Committee and related parties, will also be set up to study details of the scheme and the offering, according to Mr Krirk-krai.
He said the offering would probably be made in 50,000-tonne lots.
The minister said such a strategy would create a more effective system to stabilise rice prices, rather than the government's pledging programme. In addition, it will also improve liquidity in the rice trade.
The government now has 3.1 million tonnes of rice, and about 500,000 tonnes of paddy under the supervision of the Bank for Agriculture and Agricultural Co-operatives.
Skol Harnsuthivarin, secretary to the Commerce Minister, said more agricultural products such as Thai Hom Mali rice, sugar, shrimp and coffee were also likely to be offered for trade on the AFET.
He said a feasibility study was also being conducted to add ethanol biofuel for trade on the futures market.
Rice futures have been traded since late 2004 on the AFET, which began operations with rubber contracts in May of the same year. It also added tapioca contracts this year.
During the previous administration, hedgers and speculators complained that the high intervention prices by the government resulted in fixed prices in the spot market, which discouraged hedging or speculation on the exchange.
The high prices made local farmers happy, but made Thai rice uncompetitive with the grain from Vietnam, the world's second-largest rice exporter.
According to Mr Krirk-krai, the meeting also assigned AFET's president and the secretary-general of the Agricultural Futures Trading Commission to summarise problems and performance of the futures market, as the market itself is suffering from budget constraints and unclear support measures from the government.
Vocabulary
transparent - publicly visible, not hidden (See Wikipedia)
silos - storage tower on a farm for rice or grain
Agricultural Futures Exchange of Thailand (AFET) - Thailand's agricultural futures exchange, trading started in 2004 (See website)
risk exposure - the possibility that negative events might effect one's business
Rice Policy Committee - the government committee that sets the policy for government intervention in rice markets (Read the history of recent rice market inverventions)
price volatility - when prices move up and down a lot
stabilise prices - prevent volatility in prices
pledging programme - the government programme of intervention in the rice markets using rice mortgages, farmers give their rice to government in exchange for a price when prices are temporarily low, they either pay the money and take back the rice, or more recently they keep the money and the government is left with the responsibility of selling the rice at a reasonable price
liquidity of an asset - how quickly an asset can be turned into cash (for example by selling)
improving liquidity - making it easier to sell things on a market (turn an asset into cash)
an agricultural cooperative - (See Wikipedia on cooperatives and agricultural cooperatives)
Bank for Agriculture and Agricultural Co-operatives (BAAC) - Thai government bank specialising in microfinance and banking for farming households (See website, a case study [pdf], at the FAO, and at microfinance gateway)
Thai Hom Mali rice - a higher quality variety of rice discovered in Thailand (See Wikipedia on Jasmine rice)
ethanol biofuel - a fuel alternative to gasoline that can also be combined with gasoline, made from natural renewable agricultural products like sugar or tapioca (See Wikipedia on ethanol fuel)
rubber contracts - rubber futures contracts, a contract for future delivery of rubber (futures contracts can be used for hedging, hedging prevents losses from future price changes)
feasibility - success is possible, can be achieved
tapioca - a common vegetable that is very easy to grow in Southeast Asia, most people in the west know tapioca as a popular desert (See Wikipedia)
intervention - government intervention in rice markets, the government buying rice and setting prices rather than companies that trade in rice
to hedge - to protect against losing money
speculation - buying to resell at a profit
Agricultural Futures Trading Commission (AFTC) - regulates, supervises, and develops agricultural futures trading in Thailand, established in 2001 (See website)
stockpile - store large amounts of something like food for future use (for example there is an disaster and no food)
Answer Key:
1. Why is the Thai government going to sell part of its rice stockpile on AFET (as well as other places)?
a. To reduce its rice stockpiles (or stock).
b. To reduce its risk exposure.
2. What will be the advantages of using AFET compared to the government's existing pledging programme?
a. More effective in stabilising prices.
b. Improve liquidity in the rice trade.
3. What additional commodities might be offered on AFET in the near future?
Thai Hom Mali rice, sugar, shrimp coffee, and ethanol biofuel.
4. How long have rice futures been traded on AFET?
Since 2004.
5. What was the first commodity traded on AFET?
Rubber.
6. What is the latest commodity to be added to AFET?
Tapioca.
7. What made AFET inneffective during the Thaksin administration?
The government offered a very high rice price to farmers, a price well above the market price.
With the government, the only effective buyer of rice, the government price became the market price.
Hedging and speculating are only useful market mechanisms if prices are volatile (move up and down).
("...high intervention prices by the government resulted in fixed prices in the spot market, which discouraged hedging or speculation on the exchange.")
The high Thaksin administration rice prices were effectively a subsidy and a form of income redistribution to farmers. This subsidy was hidden to the public (not transparent).
There are two separate issues here: 1. Are subsidies and income redistribution desirable?, and 2. Is transparency in making subsidies desirable? One could easily support income redistribution to farmers but object that it should be done in a transparent fashion. It also might be the case that such an income redistribution would never be approved by the legislature if it was done transparently.
8. What were the benefits and costs of the high rice prices (subsidies) offered by the previous administration?
Benefits: Farmers were happy.
Costs: Thai rice became uncompetitive with Vietnamese rice on international markets.
9. What is vietnam's ranking on international rice markets?
It is the world's second largest rice exporter.
10. What problems is AFET currently suffering from?
a. Budget constraints.
b. Unclear support from the government.
