New bidding method proposed for rice auctions
The Agricultural Futures Trading Commission of Thailand is proposing a new rice auction method, in which the bidding would be linked to the price of the 5-per-cent white rice contract quoted at the Agricultural Futures Exchange of Thailand.
Currently, the AFTC's rice auctions are conducted for a big lot of rice with few bidders participating. The highest price wins.AFTC's proposal is to split the big lot into several small lots. The winners of each lot will be those offering the best basis, which is an addition or discount to the futures price. The basis can be calculated by considering two factors - the quality of rice in the stock of the Commerce Ministry's Public Warehouse Organisation (PWO), and the method of delivery of the rice lot. For example, if the 5-per-cent white rice futures contract for June is Bt10.80 per kilogram, and the bid winner quotes a minus 10 satang per kilogram, the winner would have to pay Bt10.70 per kilo to the PWO. It is a must for both the winner and the PWO to trade on the Agricultural Futures Exchange of Thailand (Afet). They can trade before or after the bidding is held, but they will have to close out their positions on the same day. For example, the winner goes long on the futures contract for June at Bt8 per kilo, while the PWO shorts the same contract at Bt10. If on the settlement day, the price of the futures contract is Bt9, the price the bid winner has to pay the PWO is Bt8.90. The bid winner's net cost is Bt7.90 per kilo, since it will earn Bt1 per kilo from the futures contract, while the PWO actually receives Bt9.90 per kilo, including its gain on the futures contract. AFTC secretary-general Chaipat Sahasakul said yesterday that with this new method, more bidders would join auctions and the bidding price will not be flat, as it would vary according to the price of the referred Afet contract. Also, the method would help decrease the government's burden from guaranteeing the rice price for farmers. "Over the past two years, the government spent some Bt18 billion to help farmers with the price guarantee. This method will also develop the market and boost liquidity in the exchange," he said. The AFTC and Afet are now educating rice traders about the method. Afet president Napaporn Kurupasutachai said that so far the traders were well aware of the method, but needed a test run to help them see the whole picture. Napaporn expects the test run will be held this quarter. Piyarat Setthasiriphaiboon, The Nation
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