A hedge against uncertainty

An economist by training, Nitus, 51, earned his PhD from Ohio State University in 1992 through a scholarship sponsored by the Thai Commerce Ministry.

Upon his return to Thailand, he joined the Department of Internal Trade and later worked for the committee that drafted legislation to set up the country's first agricultural-futures exchange.

"In fact, we planned to set up a market for farm commodities, such as rice, rubber and tapioca, a long time ago, but it wasn't successful due to frequent changes in government and the House dissolution.

"During the late 1970s and early 1980s, futures trading in Thailand got a bad image due to lots of scams and frauds.

"Eventually, in 1994, we managed to come up with the first law for this kind of exchange to ensure fairness, transparency and legal recourse to all the parties concerned," he says.

The world's oldest commodity-futures market is the Chicago Board of Trade, established in 1848. In Asia, the Tokyo futures market is the oldest, set up about 50 years ago.

At present, the top five farm futures markets in Asia are those in China and Japan, while smaller ones are in Singapore and Kuala Lumpur.

"For farm commodities, there are three key markets, namely, spot, forward and futures. All these markets are supposed to work in tandem to maximise market efficiency.

"The spot market is usually the cash market [such as the former Kamnan Song rice market in Nakorn Sawan province].

"The forward market is characterised by the bargaining power of buyers and sellers, mostly for 100-per-cent delivery of the goods at a specific time in the future. Prices are usually not disclosed publicly," he said.

"For the futures market, physical delivery of the goods is optional and price differences in most contracts are just offset. Additionally, we have a clear legal framework for the exchange.

"Markets such as Afet are aimed at hedging risks amid price volatility. We can lock the buying and selling prices of key commodities by participating in the futures market. This helps boost market efficiency. Secondly, Afet provides a window on price trends. At present, we have futures contracts for delivery up to the next 67 months so that farmers, traders and the like have an indication of what the markets will be like in the short and medium term.

"Afet prices can also serve as a reference for those who are preparing to enter into contracts, or for the government to conduct barter trade with other countries.

"For example, tapioca suppliers could use our prices as a benchmark when negotiating supply contracts with ethanol plants relying on the crop as raw material for bio fuel.

 "Looking forward, farm commodities will be more and more important since they are not just food for people but also the raw materials for biofuels.

"On the other hand, we've witnessed the global-warming phenomenon, which hurts farm output. Therefore, prices will be more volatile due to increased uncertainty.

"Moreover, the UN has forecast that the world's population will rise 50 per cent - from today's 6 billion to about 9 billion in 2050.

"This means higher demand for food, while the demand for biofuels also looks set to rise," Nitus said.