Thai Hom Mali Rice futures trading begins:
Will farmers hedge price fluctuation risk
instead of government intervention?
By Jon Fernquest |
Today's Bangkok Post business section looks at the new Hom Mali rice contracts that will soon be traded on Thailand's commodities exchange: AFET (Agricultural Futures Exchange of Thailand).
Hedging by purchasing futures contracts is one way that farmers could (at least theoretically) protect themselves from the risk of low prices. Hedging may be a better alternative than the current system of rice supports for rice that is currently used.
When small farmers grow rice they usually have to sell their rice immediately.
Small farmers need to pay off debts. They also don't have the large quantities of money (capital) necessary to store rice for long periods of time to wait for good market prices. Since most farmers harvest their crop at roughly the same time, there may even be a glut on the market (oversupply) and lower prices, when they sell their rice immediately after harvest.
Unlike small farmers, the government does have enough money to store rice until the price is good.
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The government price support programme for rice (rice-pledging scheme) pays farmers high prices, above the current market price, for their rice and eliminates the risk and danger of low prices that small farmers face.
How exactly small farmers would start buying rice futures contracts and replace the current system of government price supports is unclear. Any ideas?
Here is the article in full:
AFET to offer Hom Mali soon
State intervention could hurt sentimentCHAROEN KITTIKANYA & NUNTAWUN POLKUAMDEE
Tuesday July 01, 2008
The Agricultural Futures Exchange of Thailand (AFET) is preparing to introduce trading of Thai Hom Mali Rice Grade B contracts on July 14 as planned, despite lingering concerns over the effect the government's rice-pledging scheme would have on prices and the market mechanism. "Agricultural futures should be free from any intervention by the government," said Supoj Wongjirattitikarn, president of the Thai Rice Association.
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"If intervention, particularly through a pledging scheme, is needed, we would like to plead with authorities to take into account the production costs of farmers as related to costs and, more importantly, the world market conditions."
AFET president Nitus Patrayothin admitted that state intervention at fairly high pledging prices offered to farmers would affect the futures market and investors, as it would eliminate price fluctuations.
He urged the government to step aside and allow responsible organisations to help farmers by using the futures market's mechanism to manage their risk.
The AFET first began trading futures of 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. Rubber contracts dominate trade, comprising nearly 75% of overall daily turnover.
Last year, the AFET traded 89,966 futures contracts, with 5% white rice accounting for 20,473 contracts (23%), and tapioca and latex making up the rest.
Trading volume on the AFET in the first five months of this year totalled 53,386 contracts, up 75.48% from 30,422 contracts in the same period last year. Driven by rising rice prices, 21,223 rice contracts changed hands from January to May, compared with 3,876 in the same period last year.
In May alone, rice contracts rose sharply to 8,529 from 1,873 in 2007.
According to Mr Nitus, the rising rice prices should help attract more investors to the AFET.
"We strongly believe that the potential of the new product, the right timing of its launch and steady marketing activities would help make this rice more appealing to investors and operators both in and outside the country. We are also confident that Hom Mali traded through the AFET would create the reference prices for the world's market and increase the AFET's liquidity," he said.
Chookiat Ophaswongse, president of the Rice Exporters Association, said Hom Mali was currently not only the benchmark for Thai rice, but also represented the highest export value of all rice types.
Hom Mali exports have grown steadily by 10% on average over the last three years, with last year's figure reaching 1.864 million tonnes. For the first five months of this year, Hom Mali shipments amounted to 917,000 tonnes, up 21% from a year earlier.
"Hom Mali rice has great potential not only for its unique fragrance but also limited plantations," said Mr Chookiat. "Hom Mali whole grain is now getting popular among the world's consumers particularly in Africa, which previously bought only broken Hom Mali rice."
Last year, three of the top 10 Hom Mali importers - Senegal, Ivory Coast, and Ghana - were in Africa. Senegal alone imported up to 540,000 tonnes.
Thai Hom Mali Rice 100% Grade B contract would be traded under the symbol BHMR, with a contract size of 15 tonnes per unit. Trading would be allowed for both options as currently executed for 5% white rice.
Under the both-options regime, traders are allowed to settle contracts in cash or by physical delivery. In the past, only cash settlements were allowed.
Example sentences:
a futures contract - a standardized contract, traded on a futures exchange, to exchange something (rice, oil, stocks) at a price and date in the future (See Wikipedia)
hedging - reducing risk by purhasing other offsetting risks (securities with prices that move in the opposite direction, for example) (See The Economist glossary)
capital - money invested in a business (See glossary)
a glut on the market - oversupply in a market
theoretically - the concepts of economics say it is possible (but may not be practical)
Agricultural Futures Exchange of Thailand (AFET) - Thailand's future exchange for agricultural commodities (See Wikipedia and website)
Thai Hom Mali Rice - a variety of rice discovered in Thailand, a long-grain variety of rice that has a nutty aroma and a special taste (See Wikipedia on Jasmine rice)
trading of Thai Hom Mali Rice Grade B contracts - traders buy and sell contracts for future delivery of this standard of rice in the future on a certain date (See description of new futures contract)
concerns - things or aspects of a situation that people worry about
lingering concerns over - aspects of a situation that people continue to worry about
government's rice-pledging scheme - the government price support programme for rice, farmers sell rice to the government at an above market price
intervention by the government - when the government buys and sells on markets to influence or guarantee prices
natural rubber ribbed smoked sheet No. 3 (RSS3) - a standard for natural Rubber (a product of latex from rubber tree "Hevea Brasiliensis") that can be traded on the commodities exchange (See description)
daily turnover - the number of contracts that are traded on the exchange in one day
tapioca - a flavorless starchy ingredient produced from the dried root of the cassava plant and used in cooking (See Wikipedia)
latex - rubber, a milky white sap found in many trees, used in surgical gloves, condoms, and clothing (See Wikipedia on latex and rubber)
liquidity (in a securities or commodity exchange) - lots of buying and selling in the exchange, so it is easy to buy and sell (otherwise a "market maker" has to step in and buy or sell on their their "own account" providing liquidity as a service at a cost)
increase the AFET's liquidity - increase the amount of trading in the AFET exchange
a benchmark - a standard by which other similar things are measured (See glossary)
the benchmark for Thai rice - the standard for Thai rice, that other varieties of Thai rice are measured against, for example, comparing prices
a reference price, a benchmark price - a price used to compare and measure other prices
a fragrance - a pleasant smell (for example, the fragrance of a perfume)
settle a contract - carry out the exchange promised in a contract
settle contracts in cash or by physical delivery - carry out the exchange promised in a contract, by paying cash or by providing rice
cash settlements - paying cash for goods
