Prefeasibility Study of an ASEAN Rice Futures Market

This report presents a prefeasibility study of a rice futures market in the Association of Southeast  Asian Nations (ASEAN) region. Following are the main points of the study:

Economic benefits. The general consensus among potential exchanges (Singapore Mercantile Exchange and Singapore Exchange), existing exchanges (Agricultural Futures Exchange of Thailand and Zhengzhou Commodity Exchange), Thai Rice Exporters Association members, and international trading houses is that an ASEAN-based rice futures contract would provide two important economic benefits to the market: price discovery and price risk management. ASEAN rice markets are currently opaque and a futures contract could help increase market price transparency to aid all market participants in marketing and production decisions. Representatives of the international trading houses who were interviewed confirmed the hedging need for a liquid rice futures contract.

Limitations of futures markets. Futures markets have a limited role in stabilizing prices across multiple years or seasons. In effect, they reflect current and expected future supply and demand conditions, and if those conditions result in higher or more volatile cash prices, futures prices will also be higher and more volatile. In this sense, futures markets are not a panacea for removing all market price volatility.

Necessary cash market characteristics. Past studies have identified several important cash market characteristics needed to promote the success of a futures contract:

(i) Adequate cash price volatility. The regional/international ASEAN rice market is characterized by high levels of price volatility. Prices must be volatile to create hedging needs and attract speculators. On the other hand, government intervention policies, across many countries in the ASEAN region, have been specifically designed to stabilize domestic price levels. Such policies are direct substitutes for a futures contract and, if successful, negate the need for a futures contract. Thus, under this criterion, a regional contract serving the highly volatile international market would have the greatest chance of success.

(ii) A large competitive and well-defined underlying cash market that lends itself to standardization. Neither domestic nor regional/international ASEAN rice markets meet these criteria. The regional and international markets are thinly traded by a few private traders and a significant amount of trade occurs directly between governments. Both exchange and international trading house representatives interviewed expressed concern that the potential hedging pool (users of the contract) was not large enough to create enough liquidity in a contract.

In addition, the market is highly segmented between different rice varieties and there is a lack of international grading standards to measure and standardize variety and quality differences. Both exchange and international trading house representatives

Andrew McKenzie No. 19. March 2012ADB Sustainable Development Working Paper Series Prefeasibility

Prefeasibility Study of an ASEAN Rice Futures Market 

Green the new color of rice as the worlds most important food crop gets sustainability targets

UNEP.Nairobi/Manila, 1 December 2011.  At the inaugural meeting of the Sustainable Rice Platform held at IRRI's Headquarters in the Philippines this week, government representatives from Indonesia, Thailand, Vietnam and Myanmar, many international and Asia-based companies and non-government organizations participated, demonstrating their support and interest in contributing to the initiative.

"There are many different sustainable technologies and practices for rice, the world's most important food crop that feeds half the planet," said James Lomax, from UNEP, which initiated the Sustainable Rice Platform.

"The challenge is to find a mechanism for scaling up these practices and their delivery in many countries," said Mr. Lomax. "The Sustainable Rice Platform provides opportunities for promoting resource use efficiency and sustainable trade flows throughout the value chain of the global rice sector and deliver real results to the lives of rice farmers."

The Sustainable Rice Platform will draw relevant lessons from established commodity initiatives that promote sustainability, such as for sugarcane, cotton, and coffee, and apply them to rice. It will set sustainability targets, develop and promote regional and global standards of best practices for rice production, and support rice farmers to adopt these practices. It will also identify criteria to assess how well the sustainability targets are being met and if farmers are implementing the practices.

"For example, we will harness our know-how to set standards to better manage insect pests in rice to reduce the unsafe and ineffective use of pesticides, which can damage the environment and the health of farmers," said Bas Bouman, who will lead the work at the International Rice Research Institute (IRRI) ; one of the project partners.

"We can also develop and promote the use of specialized field calculators to determine the environmental footprint of water, carbon, greenhouse gas emissions, or chemical use," he added.

Rice presents a unique challenge for any quality control system because it is mostly grown by hundreds of thousands of poor farmers who have only very small farms of less than one hectare each. Moreover, 90 percent of rice is grown in developing countries in Asia where access to knowledge and support is limited.

National government agricultural departments will explore and test management practices to make them nationally relevant and to promote them to rice farmers. Non-government organizations and companies will assist to develop the sustainability criteria to help safeguard or improve environmental health.

Rice farmers, production, processing, or trade organizations and businesses, will use the Sustainable Rice Platform to secure a sustainable rice system and crucially explore incentive mechanisms for farmers to grow rice more sustainably.

"Rice is an extremely important food crop, both for Kellogg Company and the world. We are therefore delighted to support UNEP in the mass adoption of better and more sustainable rice-growing practices to improve the world's food supply and the lives of the farmers and the communities who produce it," Chief Sustainability Officer at Kellogg Company, Diane B. Holdorf.

"In addition to financial support," she added. "We intend to fast track sustainable techniques into our contract growing programs as soon as 2012. We'll share the results with the Sustainable Rice Platform and use them to inform our global rice policies and direction."

Fast facts

The Sustainable Rice Platform will set management standards for rice production that will ensure it is grown in an environmentally-sustainable and socially-responsible way;

Poverty will reduce as farmers stand to gain by higher incomes through reduced input costs, higher production, and/or getting a premium on their rice;

Consumers and processors purchasing rice grown on the Sustainable Rice Platform will be assured it is good for the environment and farmer welfare.

Contacts

Moira O'Brien-Malone, Head, DTIE Communications, UNEP Paris, tel: + 33 1 44 37 76 12, mob: +33 6 82 26 93 73, moira.obrien-malone@unep.org

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