Rice futures

[Robby nz]

I have asked this a couple of times on rice related topics in news and got no reply so I will try here.

Very basically from what I have read on AG futures, it is a contract to buy a future crop for a set price with sometimes only a small deposit paid. This contract can then be traded on the exchange.

Please correct me if I have that wrong.

So how does this work with selling old stock as the Govt is now doing with rice?

Do the winning bidders actually take delivery of the rice they bid on ?

Do they pay the full agreed price to the seller after a bid is accepted ?

Answers to those two questions will lead to more questions I would think.

[Robby nz]

So 2 days and 149 views.

I have to assume that at least 150 of us don't know anything about this one.

Still I will look again tomorrow just in case there is someone who does know.

[Duff]

So 2 days and 149 views.

I have to assume that at least 150 of us don't know anything about this one.

Still I will look again tomorrow just in case there is someone who does know.

Hello Robby,

Your question is a bit confusing because I don't really know whether are talking about rice auctions ("winning bidder", "bid accepted") or the rice futures market.

Can't help you about the government auctioning their rice, but I know about futures

Only a few people know about futures as it's an instrument used solely by companies to buy/sell a commodity and speculators with deep pockets.

Unlike what most people think, futures are a way for companies to protect themselves against the rise or the fall of the price of commodities.

About how futures contracts work you're right.

They are contracts to buy or sell a commodity in the future at a certain price.

You buy (go long) a future contract if you want to buy a certain commodity in the future, to protect yourself against a rise in price. When you are a long a future contract and it expires, you will have to obligation to buy the underlying commodity at the agreed price.

You sell (go short) a future contract if you want to sell a certain commodity in the future, to protect yourself against the price falling. When you are a short a future contract and it expires, you will have to obligation to sell the underlying commodity at the agreed price.

Futures are also used by speculators and it's a fantastic tool if you know what you are doing, and can also wipe you out if you don't.

To enter a future contract, a margin is required which is a sum of money, 5% to 15% of the total value of the contract, depending on the commodity.

This is why speculators love it.

Let's say the margin is 5% => with $5000, you can play with $100,000. If you are long a future contract for let's say $100,000 with a margin of $5000, when the price of the contract increase by 10%, you've just made a 200% profit if close your position. Problem is, it's the same the other way around when you lose and you can lose a LOT more than what you've bargained for...

[Robby nz]

Thanks for that Duff, sorry if I did not make myself clear.

Your explanation corresponds to what I have read about futures in the Agg industry.

However this does not seem to gell with what the Govt is trying to do, IE sell old stock rice.

In the following article they refer to " the Agricultural Futures Exchange in Thailand (AFET) "

That is what I what I was referring to.

BANGKOK, March 27 – The Commerce Ministry has given assurances that it will pay back Bt20 billion it borrowed from the central fund to make good the overdue payment to farmers under the rice pledging scheme within May as required.

Caretaker Deputy Commerce Minister Yanyong Phuangrach expressed confidence that nearly one million tonnes of rice will be released through the Agricultural Futures Exchange in Thailand (AFET) this year.

The Commerce Ministry expects to earn more than Bt6 billion after auctioning over 500,000 tonnes of rice through AFET this month, he said.

He said 230,000 tonnes of rice will be auctioned in the eighth round with 13 bidders, including three new ones.
The seventh auction released more than 500,000 tonnes of rice, at a total value of Bt6 billion, he said, adding that this year’s rice release via AFET will break the 2009 record when 600,000 tonnes of rice were auctioned through AFET.

Mr Yanyong said the Commerce Ministry will try to release rice through AFET twice a month at 200,000 tonnes in each auction, and the next bid in April will involve 100,000-200,000 tonnes of rice.

He said government-to-government trading with China is another channel to release rice and the Commerce Ministry has targeted selling 100,000 tonnes of rice to China each month.

It’s quite likely that the Finance Ministry will be paid back the Bt20 billion owed by the May deadline, he said.

He said the Commerce Ministry has inspected more than 60 per cent of the government’s rice stocks and should wrap up the survey on March 30. (MCOT online news)


-- TNA 2014-03-27

[Duff]

I see. Well, it seems that the AFET not only operates the futures exchange but also organizes rice auctions.

Here was the lastest one: http://www.afet.or.th/2013/en/news/press/detail.php?id=931

Thanks for that Duff, sorry if I did not make myself clear.

Your explanation corresponds to what I have read about futures in the Agg industry.

However this does not seem to gell with what the Govt is trying to do, IE sell old stock rice.

In the following article they refer to " the Agricultural Futures Exchange in Thailand (AFET) "

That is what I what I was referring to.

BANGKOK, March 27 – The Commerce Ministry has given assurances that it will pay back Bt20 billion it borrowed from the central fund to make good the overdue payment to farmers under the rice pledging scheme within May as required.

Caretaker Deputy Commerce Minister Yanyong Phuangrach expressed confidence that nearly one million tonnes of rice will be released through the Agricultural Futures Exchange in Thailand (AFET) this year.

The Commerce Ministry expects to earn more than Bt6 billion after auctioning over 500,000 tonnes of rice through AFET this month, he said.

He said 230,000 tonnes of rice will be auctioned in the eighth round with 13 bidders, including three new ones.
The seventh auction released more than 500,000 tonnes of rice, at a total value of Bt6 billion, he said, adding that this year’s rice release via AFET will break the 2009 record when 600,000 tonnes of rice were auctioned through AFET.

Mr Yanyong said the Commerce Ministry will try to release rice through AFET twice a month at 200,000 tonnes in each auction, and the next bid in April will involve 100,000-200,000 tonnes of rice.

He said government-to-government trading with China is another channel to release rice and the Commerce Ministry has targeted selling 100,000 tonnes of rice to China each month.

It’s quite likely that the Finance Ministry will be paid back the Bt20 billion owed by the May deadline, he said.

He said the Commerce Ministry has inspected more than 60 per cent of the government’s rice stocks and should wrap up the survey on March 30. (MCOT online news)


-- TNA 2014-03-27

[SheungWan]

An auction may be for immediate ownership.

The futures contract may be for a contract to assume ownership in say one month, three months. The government would be assigning to the exchange the responsibility to sell the rice over a period of time, so not just auction intervals. At end there is a physical delivery. The futures contract can still be traded.

In addition there are options whereby there is no actual delivery but a contract settled in cash. This might be used as a hedge against the futures contract.

[AyG]

The government would be assigning to the exchange the responsibility to sell the rice over a period of time, so not just auction intervals.

That can't be right. It's the body selling the futures that is responsible for selling the rice - not the exchange, which simply acts as a forum for buyers and sellers of futures to transact.

[CWMcMurray]

Futures is setting a future date at which point the seller of a commodity must sell and the buyer must buy... Doesn't mean that the farm product must come from a future crop..

You could sell futures to buy the can of beans in my basement in six months from today.. Even though that can of beans was made 10 years ago...

Any takers?

Sent from my iPhone using Tapatalk

Edited April 16, 2014 by CWMcMurray

[AyG]

Futures is setting a future date at which point the seller of a commodity must sell and the buyer must buy...

Not all futures contracts include physical delivery of the underlying commodity. Some are settled in cash (financial settlement), based upon the market price of the commodity concerned. It all depends upon the terms of the contract traded.

In reality, even if the contract is for physical delivery, usually the trader will buy an equal and opposite contract. These contracts cancel each other out, so no commodity is actually bought or sold. At NYMEX, for example, less than 1/2% contracts actually result in commodity delivery.

[SheungWan]

The government would be assigning to the exchange the responsibility to sell the rice over a period of time, so not just auction intervals.

That can't be right. It's the body selling the futures that is responsible for selling the rice - not the exchange, which simply acts as a forum for buyers and sellers of futures to transact.

Yes, the sales go through the exchange.

[SheungWan]

Futures is setting a future date at which point the seller of a commodity must sell and the buyer must buy...

Not all futures contracts include physical delivery of the underlying commodity. Some are settled in cash (financial settlement), based upon the market price of the commodity concerned. It all depends upon the terms of the contract traded.

In reality, even if the contract is for physical delivery, usually the trader will buy an equal and opposite contract. These contracts cancel each other out, so no commodity is actually bought or sold. At NYMEX, for example, less than 1/2% contracts actually result in commodity delivery.

Some futures markets might appear to operate more like options markets, but in the case of Thai rice we are assuming that the government would like to physically shift the stuff.

[AyG]

Futures is setting a future date at which point the seller of a commodity must sell and the buyer must buy...

Not all futures contracts include physical delivery of the underlying commodity. Some are settled in cash (financial settlement), based upon the market price of the commodity concerned. It all depends upon the terms of the contract traded.

In reality, even if the contract is for physical delivery, usually the trader will buy an equal and opposite contract. These contracts cancel each other out, so no commodity is actually bought or sold. At NYMEX, for example, less than 1/2% contracts actually result in commodity delivery.

Some futures markets might appear to operate more like options markets, but in the case of Thai rice we are assuming that the government would like to physically shift the stuff.

The government, undoubtedly, would like to "shift the stuff", but in using the futures market there is no guarantee that this will actually happen; all the contracts may be closed out before delivery. Only if there is a demand for physical delivery of rice are contracts going to mature, and that depends upon the demand for rice. The government is basically making a gamble, with no guarantee of success.

And if there is a demand for rice, why is the government using the futures market, rather than simply selling the stuff to those who want to buy it? It's difficult to know whether to blame stupidity, incompetence, or corruption, but perhaps one of these is part of the equation here. Or perhaps it's all a "smokes and mirrors", "fool the public" scam.

[Robby nz]

This all has led me to some other questions.

Have had a hunt around on the AFTC site and having never been involved in such it is a bit of a mystery to me, however.

From the AFTC site

The Agricultural Futures Exchange of Thailand (AFET) invites rice traders to join the 6/2014 rice auction from government supplies based on futures prices in AFET that will be held on April 9th, 2014 at 9.00 - 12.00 hrs. at Ballroom 1, Richmond hotel, Nonthaburi.

"Based on futures prices in AFTG"

Any ideas how the above would differ from world prices ?

The auction mentioned was held on 9 April, I have seen no reports of how it went, Anyone else ?

[SheungWan]

Futures is setting a future date at which point the seller of a commodity must sell and the buyer must buy...

Not all futures contracts include physical delivery of the underlying commodity. Some are settled in cash (financial settlement), based upon the market price of the commodity concerned. It all depends upon the terms of the contract traded.

In reality, even if the contract is for physical delivery, usually the trader will buy an equal and opposite contract. These contracts cancel each other out, so no commodity is actually bought or sold. At NYMEX, for example, less than 1/2% contracts actually result in commodity delivery.

Some futures markets might appear to operate more like options markets, but in the case of Thai rice we are assuming that the government would like to physically shift the stuff.

The government, undoubtedly, would like to "shift the stuff", but in using the futures market there is no guarantee that this will actually happen; all the contracts may be closed out before delivery. Only if there is a demand for physical delivery of rice are contracts going to mature, and that depends upon the demand for rice. The government is basically making a gamble, with no guarantee of success.

And if there is a demand for rice, why is the government using the futures market, rather than simply selling the stuff to those who want to buy it? It's difficult to know whether to blame stupidity, incompetence, or corruption, but perhaps one of these is part of the equation here. Or perhaps it's all a "smokes and mirrors", "fool the public" scam.

Because if a futures contract is for physical delivery then the rice can be sold not just for delivery now, but for the future, so a contractor can purchase the stuff forwards say over the next 12 months at different intervals if the price is advantageous. Contracts for physical delivery may be closed out by a single trader, but held by last man standing. An example of this would be the delivery of the contents of an oil tanker which may change ownership during voyage but someone takes delivery at end.

[AyG]

The prices on the exchange are pretty closely correlated to world prices.

A typical rice futures contract will specify the precise type and quality of the underlying commodity, and the exchange prices should broadly mirror the "real world" cost of rice of that type. There are a few other factors such as rice price volatility (the buyers and sellers of futures are taking on a risk that the price might move against them, and so need to be compensated for that risk) and current interest rates (because payment for a futures contract will be made in the future).

[AyG]

Contracts for physical delivery may be closed out by a single trader, but held by last man standing. An example of this would be the delivery of the contents of an oil tanker which may change ownership during voyage but someone takes delivery at end.

I'm not sure what your point is here.

(1) There doesn't have to be a "last man standing" - all exchange-traded futures contracts can be closed out before maturity, so there's no necessity whatsoever for any physical delivery.

(2) The "contents of an oil tanker" comparison is not relevant since the discussion is about exchange traded (not OTC) futures.

As far as I can see, there's no certainty whatsoever that the Thai government's trying to sell rice through a futures exchange will actually result in the shifting of any physical rice.

[SheungWan]

The prices on the exchange are pretty closely correlated to world prices.

A typical rice futures contract will specify the precise type and quality of the underlying commodity, and the exchange prices should broadly mirror the "real world" cost of rice of that type. There are a few other factors such as rice price volatility (the buyers and sellers of futures are taking on a risk that the price might move against them, and so need to be compensated for that risk) and current interest rates (because payment for a futures contract will be made in the future).

One would doubt that Thai price is sold on the CME rough rice futures market. However undifferentiated rice prices would provide an underlying price floor for Thai rice which is expected to sell at a premium. One would expect the same with the coffee market. As part of its original plan to warehouse and sell Thai rice in limited quantities on world markets the Thai government expected to command sufficient premium to cover the higher price guaranteed to farmers. What they didn't expect was that other countries would step in (eg Vietnam) to produce sufficiently higher quality rice, which though not having the Thai label, sufficiently satisfied the premium quality market at a cheaper price and more importantly at a price lower than the Thai government guaranteed. However the Thai government will certainly not want to sell rice at a bog-standard price.

[dotpoom]

Futures is setting a future date at which point the seller of a commodity must sell and the buyer must buy... Doesn't mean that the farm product must come from a future crop..

You could sell futures to buy the can of beans in my basement in six months from today.. Even though that can of beans was made 10 years ago...

Any takers?

Sent from my iPhone using Tapatalk

When will it have "Antique" value?

[Dave Phuket Sisaket]

My understanding of this all is that the futures exchange as an organization is simply helping the government organize an auction of their physical rice.

If the government wanted to hedge their exposure to their physical stockpile they could sell futures contracts (although with such a large position they would likely send the price down and speculators would jump on the trend and further depress prices. They still would need to find physical buyers to unload the stuff though, the futures gains from the short position would just offset (partially only in reality) the loss they would face from the fact they need to sell at rock bottom prices.

In terms of rice trading at different prices on different exchanges, other than differences based on quality, arbitrage opportunities will keep the prices pretty much in line. Basically what this means is that if the prices of the two contracts start to diverge, some guy at Goldman Sachs with a billion dollar position limit will sell the more expensive contract while simultaneously buying the cheaper contract for a risk free profit. This activity brings the prices back in line..

[bitcoinbob]

the AFET of thailand has low to no volume, thats the first problem. next problem is a free and honest flow of information given out in a timely manner, how many acres are growing rice, how many tons in stock reality not make believe fanstay land. futures market are in price discovery business first and foremost , the thais are not into dealing with reality so there rice furtures market does not function and will never function properly. if they make it open and honest people will show up and bid and offer and creaet a real price discovery market that exist in other place for other commodities. never happen here.they trade u.s. rice in chicago low volume 1500 to 2000 contract a day but lots more then ththai futures i think last time i looked 10 contract if that. there only hope give it away to needy countries and start all over again the big global rice houses saw this coming and the thais do not want to pay them world prices to take it off there hands so now they will end up with rot what a waste. they could get rid of there total supply to the big house but they would lose face and lose money so now they are trying to come up with the auction scheme what a waste

[eddie61]

The person to ask is Thaksin Shinawat.

He and his cronies in government are (very) long on rice, unfortunately with taxpayers money, and the shirts on farmers backs.

I bet his private wealth speculates in short rice positions.

[Robby nz]

The prices on the exchange are pretty closely correlated to world prices.

A typical rice futures contract will specify the precise type and quality of the underlying commodity, and the exchange prices should broadly mirror the "real world" cost of rice of that type. There are a few other factors such as rice price volatility (the buyers and sellers of futures are taking on a risk that the price might move against them, and so need to be compensated for that risk) and current interest rates (because payment for a futures contract will be made in the future).

If that is true AyG then how does that help the farmers right now, or the Govt to pay back the borrowed 20 billion to the central fund ?

My understanding of this all is that the futures exchange as an organization is simply helping the government organize an auction of their physical rice.

You may well be right on that Dave but I believe the commerce ministry is also holding auctions so it would seem strange that 2 organisations are

doing the same thing at the same time, unless each has a different set of clients.

Hay fells lets not get into the blame someone game that's not why I started this topic. Keep that for rice related topics in news.

I just want to get a better understanding of how the selling and payment business works and how it does or does not help the farmers.

[Duff]

Couldn't agree more

My understanding of this all is that the futures exchange as an organization is simply helping the government organize an auction of their physical rice.

If the government wanted to hedge their exposure to their physical stockpile they could sell futures contracts (although with such a large position they would likely send the price down and speculators would jump on the trend and further depress prices. They still would need to find physical buyers to unload the stuff though, the futures gains from the short position would just offset (partially only in reality) the loss they would face from the fact they need to sell at rock bottom prices.

In terms of rice trading at different prices on different exchanges, other than differences based on quality, arbitrage opportunities will keep the prices pretty much in line. Basically what this means is that if the prices of the two contracts start to diverge, some guy at Goldman Sachs with a billion dollar position limit will sell the more expensive contract while simultaneously buying the cheaper contract for a risk free profit. This activity brings the prices back in line..

Sent from my iPhone using Thaivisa Connect Thailand

[AyG]

The prices on the exchange are pretty closely correlated to world prices.

A typical rice futures contract will specify the precise type and quality of the underlying commodity, and the exchange prices should broadly mirror the "real world" cost of rice of that type. There are a few other factors such as rice price volatility (the buyers and sellers of futures are taking on a risk that the price might move against them, and so need to be compensated for that risk) and current interest rates (because payment for a futures contract will be made in the future).

If that is true AyG then how does that help the farmers right now, or the Govt to pay back the borrowed 20 billion to the central fund ?

Quite frankly, I don't think the use of rice futures will do anything to help the farmers, or help the government sort out its financial mess.

There's a possibility that there's someone out there will buy futures contracts with the intention of taking physical delivery of the rice. It's a long shot and certainly won't come anywhere close to shifting the vast stockpiles there currently are.

The government is so desperate that the fact that payment would be made in the future when the rice is physically delivered is (to the government) not important.

The government is in a bind and blindly flailing around for solutions and hoping that the rice farmers (whom it looks down upon and consider too stupid to understand what's really happening) will be placated. After all, it's going to need their votes in the next election, whenever that is.

Edit: fixed quotes

Edited April 18, 2014 by AyG

[fletchsmile]

As you ll have noticed every answer you get will make you think of another question.

I suggest you look on afet.or.th under the rules and regulations.

If you look for the tab on "products" then look for the "contract specification" docs that will answer many of your questions. They are about 10 to 20 pages in length.

Knowing the product and contract spec is key.

Certain contracts can be settled either in cash or in stock."both options". For this there is a matching process where cash is default and any xs of people taking delivery over making is settled in cash.

For other contracts they are FOB and expected to be settled by delivery. It is these I would expect the government to be using if they actually want to offload stock not the "both options" type.

Of course as with all futures it is only those that are not closed out before last day of trading that are settled in cash or by delivery.

I m guessing but the govt are probably selling something like the FOB(WRF5) futures which are for delivery when people refer to selling contracts. Old stock would not necessarily always make the contract specs for QC. So....

I believe they also use the infrastructure to invite traders for specific auctions on specific dates. This would allow people to know it is specifically the govt rice auction. Doing for a separate auction is separate to normal futures trading. Here they can specify 2012/2013 rice for example which would not be eligible and meet the usual trading criteria.

The contract specs will also answer your questions on how delivery is made quality control etc.

So broadly two methods may be possible

1. Selling newer rice via standard future contracts

2. Auction where they can specify different specs.

Cheers

Fletch

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Edited April 21, 2014 by fletchsmile