Farm futures can help investors diversify risk, boost profits

Data from the Agricultural Futures Exchange of Thailand (Afet) show that rubber futures (RSS3), for instance, rose to 161 points last month from an adjusted base of 100 points in May 2004, compared with 129 for stocks (Stock Exchange of Thailand Index) and 109 for bank deposits during the period.

And the price movement of rice futures was faster than that for gold and crude oil during the period, he said.

Afet data show that futures for 5-per-cent Thai white rice rose to 345 points, compared with 270 for crude oil (spot price West Texas) and 185 for gold in the same period.

Tapioca is another hot commodity for the Thai farm futures market. Its contracts rose to 203 in the period - higher than gold, stocks and bank deposits.

Chaipat said investing in farm futures was the same as investing in SET 50 Index futures, with no physical delivery of commodities in most of the contracts. "Futures contracts are aimed at hedging risks in the financial market. For actual delivery, the cost via Afet would be higher, so it's better for risk management."

"At the Chicago Board of Trade [the world's largest exchange for farm futures', only 2-3 per cent of contracts are physically delivered," he said.

As a result, investors/speculators have a high degree of leverage in playing the futures market. A buyer, for instance, is required to put down only 5 per cent of the value of futures contracts as a performance bond with the exchange.

On the other hand, a seller is also required to put down 5 per cent of the value of contracts with the exchange, whose role is to provide fairness, transparency and legal safeguards for both buyers and sellers.

Rice contracts are the most popular, accounting for 70 per cent of Afet's trading volume.

If you are interested in rice futures, you might start with an investment of between Bt18,700 and Bt24,000 for a standard contract of 15 tonnes of 5-per-cent Thai white rice, based on last week's price of Bt25 to Bt26 a kilogram.

Even though the actual price for 15 tonnes is in the range of Bt300,000 to Bt400,000, you only need to put down 5 per cent of the contract value.

However, Afet will issue a margin call if you are a seller and the price rises above the 5-per-cent mark; and vice versa if you're the buyer and the price drops below the 5-per-cent-mark.