Published on January 31, 2005

Since most ordinary investors are still hesitant about getting into the agricultural futures market, here are a few pointers on how it differs from trading in shares

Some investors have already dabbled in the Agricultural Futures Exchange of Thailand (Afet), but more than a year after it opened, many others are still wondering what this new investment toy is.

Afet is a futures market exclusively for agricultural products. However, only two products, natural rubber ribbed smoked sheet and white rice 5 per cent, are traded on it so far.

If you understand how Afet works, then it’s advisable to put 5-10 per cent of your investment funds in the market, given the fluctuations of the stock market and of yields in the bond market.

In fact there are some similarities between the stock market and agricultural futures market.

First, investors in both markets must place orders through brokers who are licensed to execute transactions by the respective exchanges. The Stock Exchange of Thailand (SET) has 49 brokers while Afet has 16 brokers.

Second, trading on the SET and Afet is controlled by commissions. The Securities and Exchange Commission (SEC) regulates the stock market while the Agricultural Futures Trading Commission (AFTC) supervises Afet.

However, there are also many differences between the two markets that may confuse novices.

The type of products on both markets is different. The SET is a market for trading over 400 stocks and dozens of warrants of listed companies as well as dozens of mutual funds, while Afet is a market for trading futures contracts of agricultural products.

You receive shares when your order is executed on the bourse, but you get contracts when your order is executed in the commodity market. If you want to obtain the underlying assets of the contract, you must wait until the contract is due.

Each contract is for fixed amounts, five tonnes for natural rubber ribbed smoked sheet and 15 tonnes for white rice 5 per cent.

Given that products traded on Afet are contracts, not the underlying assets, investors are required to pay only the initial margin and minimum guarantee, not the full value of the goods, whereas when you purchase shares on the stock market you have to pay the full value of the stock.

Those who trade natural rubber ribbed smoked sheet on Afet have to deposit a Bt16,900 initial margin per contract, which works out to Bt3.38 per kilogram, with a broker. They also deposit an additional Bt12,700 per contract with the broker as the minimum guarantee.

Both the initial margin and the minimum guarantee are set by Afet.

For example, if you buy a rubber contract at Bt50 per kilogram but the price drops to Bt49 next day. That means you lose Bt1 per kilogram, so your initial margin will shrink from Bt3.38 to Bt2.38, and you will be asked to deposit an additional Bt1 per kilogram to maintain your initial margin amount. If you do not put in the additional amount, the broker will force you to sell the contract immediately by deducting the lost portion from the minimum guarantee.

If you hold the contract until it falls due and the rubber price at that time stands at Bt48, your broker will deduct Bt2 per kilogram from your initial margin and pay back the leftover portion to you. You will have to pay Bt50 per kilogram to the real sellers who deliver you the rubber as stated in the contract.

Buyers or sellers of rice contracts on the Thai commodity market are also required to put up an initial margin and minimum guarantee.

Although increments in bids and offers for rubber and white-rice contracts are set at 0.1 per cent and 0.02 per cent of the underlying asset values respectively, investors can make larger losses or gains in terms of value on Afet than on the stock market. This is because of the underlying asset value, which may exceed tens of thousands of baht per contract.

Investors in the commodity market are of three types, hedgers, speculators and arbitrageurs, while all investors in the stock market are regarded as speculators.

Hedgers are those who buy contracts to hedge against risk by locking prices for the foreseeable future. Hedgers are people who have businesses related to these commodities, such as rubber- or rice-exporters, tyre-manufacturers etc.

Speculators are those who invest to turn a profit. They bear higher risk than hedgers as they are not involved in the rubber or white-rice businesses and therefore don’t actually want the underlying assets.

Arbitrageurs are those who seek profit by making arbitrage from commodity prices in several countries. Their profits are always lower than speculators’ profits, but they take less risk.

Duration of investment is another difference. A stock never expires unless it’s a warrant or covered warrant, while the contracts in Afet fall due in a period agreed between buyers and sellers, though not exceeding six months.

Last but not least, stocks can rise or fall in a day by up to 30 per cent of their value the previous day, while the movement of agricultural futures contracts is limited to 3 per cent either way.

Piyarat Setthasiriphaiboon

The Nation

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