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Published on October 15, 2007

The Internal Trade Department has ordered the Agricul-tural Futures Ex-change of Thailand (Afet) to clarify how it will achieve its five-year business plan after winning a Bt110-million budget. The move follows a sharp reduction in the number of transactions in the commodity futures market, a source said.

The source from the Agricul-ture Futures Trading Commis-sion (AFTC) said the market, which commenced operations in 2004 and once witnessed a daily-transaction peak of 1,000 contracts, now handled only about 100 contracts a day.

The low volume has forced at least eight brokers from 17 brokerage companies to shut their businesses.

The source said the Internal Trade Department had earlier approved a Bt110-million budget for this fiscal year, which started in October, with the condition that Afet must clarify to the department how it would achieve its business plan.

"There is this condition as the department is sceptical about whether Afet will be able to achieve its plan," he said.

Afet earlier submitted a five-year plan to the department saying that by the end of last year its daily trading volume would be about 500 contracts, increasing to 1,000 this year and 1,800 in 2008.

However, over the first six months of this year the trading volume was about 350 contracts per day, against the level achieved at the end of last year, namely 500-600 contracts. The daily volume has since fallen further, to about 100 contracts.

However, Afet president Napaporn Kurupasutachai recently said the current low trading volume was due mainly to the impact of the US sub-prime lending crisis. The crisis has also lowered daily trading in the Tokyo Commodity Market (Tocom) from 40,000 contracts to just 10,000.

Afet uses Tocom as a reference market, she said.

The source added that of the Bt110-million budget, Bt90 million would be allocated for fixed costs and the remaining Bt20 million for strategic operations.

He said that if the exchange could not achieve its goal, its very existence would be at risk. The following year's budget would be more difficult to get, while Afet's income is insufficient to meet its costs.

"The AFTC and the department as regulators are concerned with Afet's performance. We're worried whether Afet can manage to survive for another year," the AFTC source said.

He said the AFTC had already intervened in Afet's operations, as the exchange directors who are representatives of the commission have given marketing and promotional plans direct to Afet. "They didn't wait for the management to ask for it," he added.

Afet's board will meet at the end of October and on the agenda is adjusting the payments for management and also the term of its president. Napaporn has been president for three years of a four-year term.

Chanon Phucharoenyos, CEO of JSP Futures, said that so far there had been only limited cooperation between Afet Association Company and Afet on market development, particularly the issue of the investor base.

He said the exchange focused too much on hedgers. However, the key factor in boosting trading volume is not only investors who are speculators, but also medium and long-term investors, which the Afet does not seek to attract.

In addition, Chanon said some of Afet's staff lacked a proper understanding of the agricultural futures market. This reduces efficiency and means the exchange has been unable to maintain its business plan over the past three years, he said.

He added that the brokers that had shut down could not bear the burden of their losses.

"Investors that used to trade in Afet have moved to the Thailand Futures Exchange as they couldn't make a profit, and that's why the volume has fallen to only 100 contracts. The brokers need at least 400 contracts per day [between them] to balance their books," he said.

Nobuya Saito, a representative of Japanese shareholders in JSP Futures, said Japanese shareholders however still saw the growth potential of Afet, but there is a need for promotion and education of investors to create an investor base. The exchange should focus on investors that need Afet as a financial tool.

For example, he said, the agricultural futures market in China, whose major product is rubber - as is Afet's - grew to 200 times its original size in the first five years of operations. The key strategy in attracting investors had been the holding of 400 seminars per year.

However, over the next two years, if Afet still shows no signs of growth, the Japanese shareholders may consider divesting their shares, said Saito.

The Nation