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. thus, the establishment of the agricultural futures exchange of thailand ( afet ) by the ministry of commerce was a major step in the right direction. the futures market aims to provide an efficient and effective mechanism for the management of price risks. by buying or selling futures contracts - contracts that establish a price level now for items to be delivered later - individuals and businesses have access to insurance against future adverse price changes. futures market is a continuous auction market whereby prices should reflect the latest information about supply and demand conditions. this price discovery mechanism allows producers to be better informed when making their production plans. even for small producers who may not actively participate in the futures market, the transparency and the availability of the futures prices in the public domain should enable them to negotiate and obtain fair prices for their produce. since afet opened for trading in may 2004, the daily average turnover for a rubber sheet in the afet rose almost 8 - fold in 2 years to 400 contracts. this increase may look

in the futures market. this is particularly the case when the guaranteed buying prices from the government are set at relatively high level compared to market - determined prices. i mentioned before that the average daily turnover in the afet now is around 400 contracts. however, the majority of the trading is heavily concentrated in the ribbed smoked rubber sheet no. 3 while the contracts for white rice are rarely traded. i cannot help but feel that the existence of the price support scheme may have contributed to this apparent lack of interests in rice futures trading. as of last friday, only 3 contracts for white rice were traded and the open interests were only for 60 contracts equivalent to 300 metric tonnes. for a country that exported 7. 6 million tonnes of rice last year - the highest volume in its history, i believe our rice futures market has high potential to grow, if conditions are right. the government guaranteed prices are set once a year and thus, do not incorporate new information into the price. on the contrary, futures contracts are traded on a daily basis and these prices are said to be the best predictor of prices in the future – pricing in all currently available information. players should be encouraged to hedge their produce through the futures market rather than through a static price - support scheme. in the medium term, the price - support scheme should be eventually phased out so that our producers would be freed to stand on their own feet. it is crucial that we implement the change gradually to enable those involved to adjust. i feel that we should strive in this direction - it is only then would our producers be able to respond to competition in the global market place. these days, many agricultural - related products in thailand are subject to price ceilings. these price control schemes coupled with the price support projects outlined above mean that the market mechanism is not well - functioning. distorted prices in the spot market may have also discouraged foreign players from participating actively in our futures markets. a freely traded spot market is a necessary condition for a successful futures market. ladies and gentlemen, i would urge the board of directors of afet and aftc, the ministry of commerce, the government, all members of afet and key players in our main agricultural products to be totally committed to making afet a highly successful futures market - an exemplar to our neighbours and one where global trading is benchmarked. we need to be strategic, prioritising our products and evaluating needs of different participating groups. i pledge my full support to this cause. i