M R Pridiyathorn Devakula: Challenges and opportunities facing the Thai futures market Remarks by Mr M R Pridiyathorn Devakula, Governor of the Bank of Thailand, at the gala dinner hosted by The Agricultural Futures Exchange of Thailand, Bangkok, 23 February 2006. *  *  *  Distinguished Guests, Ladies and Gentlemen, It is a privilege for me to be here today amongst distinguished personalities from the banking and finance industry. First of all, I would like to thank the Agricultural Futures Exchange of Thailand for inviting me to address this distinguished audience. I have been asked to share some thoughts with you on the challenges and opportunities that I see facing Thai futures market going forward. Thailand has been one of the world’s leading producers of agricultural products. Thailand has always been top-ranked in rice, tapioca starch, sugar and natural rubber production. In fact, Thailand has been the world’s largest rice exporter for more than a decade. Our rice export accounts for no less than one quarter of total world’s rice exports. Likewise, we supply more than one-third of the world’s total natural rubber production. With roughly half of our labour force being employed in the agricultural industry and with rice alone earning almost 2 billion U.S. dollars last year, the importance of the sector towards Thai economy cannot be overstressed. However, unique characteristics of agricultural products are that of long supply adjustment lags and inelastic demand. Prices therefore tend to exhibit inherently high volatility.
One possible solution I think is that of making all contracts on AFET U.S. dollar denominated. This way, the arbitrageurs are not exposed to any foreign exchange risk and they can manage their positions across markets with ease. Of all the commodities listed on SICOM, only one contract namely ribbed smoked rubber sheet no. 1 is Singapore dollar-denominated and coincidentally, it is also the least liquid contract on the SICOM. All other contracts are denominated in U.S. dollar. Moreover, commodity prices in the world are generally quoted in U.S. dollar, therefore, corporate buyers and sellers are already aware of their costs and revenues in terms of U.S. dollar. If we aim to establish futures price of, for instance, white rice on the AFET as a benchmark, it is logical for this reference price to be denominated in an international currency such as the U.S. dollar. That way, the price quotations would purely reflect all relevant information relating to demand and supply conditions of the products and are not influenced by exchange rate fluctuations. Some may express concern, however, that by eliminating foreign exchange risk for foreign arbitrageurs, we in turn, expose our local producers and end-users to the very same risk. I feel, on the contrary, that local buyers and sellers are already accustomed to commodity prices being quoted in U.S. dollar in the world market and manage the risk in a proficient manner.