Singapore

home of an international rice futures market

Singapore is ideally situated to become the hub of an international rice futures market thanks to its political stability, geography, infrastructure, and trading experience and capacity. In establishing an international rice futures market, Singapore could also play an important part in helping the world achieve food security, keeping rice prices affordable for poor rice consumers, and ensuring its own supply of rice into the future.

The world needs an international rice futures market

The development of an international rice futures market in Singapore would help stabilize rice prices and contribute to national, regional, and global food security in rice-dependent areas. Rice futures markets already operate in the United States, China, India, Thailand, and other Asian countries, but they primarily cater to domestic traders, play a minimal role in price discovery at the international level, and have low liquidity. In addition, Asian rice futures markets are affected by changing domestic policies that make it riskier for outside traders to use them as an effective hedging tool. An international rice futures market in Singapore could help in price discovery and stabilization of the global rice market. This would benefit governments, consumers, and farmers. Farmers will benefit indirectly through the participation of market intermediaries such as cooperatives, traders, input suppliers, and credit organizations. Market price information disseminated through a futures market should also directly help farmers to negotiate better prices and make crop management decisions based on market data.

Singapores suitability to host an international rice futures market

Location
Singapore has the necessary physical and financial infrastructure to easily enable foreigners to hold positions in a futures market. The political sensitivity of rice in Singapore is less than in its Asian neighbors, thus helping reduce the chances of government intervention.

Functioning commodity exchanges

Singapore already has three well-functioning exchanges where commodity futures are traded the Singapore Commodity Exchange Limited, Singapore Exchange Limited, and Singapore Mercantile Exchange. It would be costeffective and convenient to add a rice futures contract to one of these existing exchanges.

Institutional and physical infrastructure

Singapore has a strong institutional infrastructure that could develop a wide network of regulated warehouses, a system of grades and standards, a network of licensed testing facilities, and an enabling policy regulatory environment needed for a successful futures market.

History of rice prices

Data source: Rice Market Monitor, FAO

Between the late 1940s and late 1960s, real rice prices of the benchmark Thai 5% broken rice, expressed in year 2000 dollars, hovered around US$8001,000 per ton. Following a serious price spike associated with the first oil shock in 1974, prices declined steadily, reaching a historic low of under $170 per ton in 2001. Prices then began a gradual increase until 2007. In 2008, rice prices doubled to reach $520 per ton. A tight supply situation in the global rice market partially fueled by panic buying and export restrictions by key countries caused the high. Rice prices dropped soon after, but have remained about 50% higher than before the crisis. Rice prices are also more volatile now than a few years ago. Since the crisis, Asian countries where rice is the staple food have moved away from food security policies and toward food self-sufficiency policies. This has resulted

in more controls on the flow of rice in and out of countries, which has included many secret government deals that reduce rice price transparency further. If countries persist

with these efforts, the global rice market will become smaller and less stable. Nonetheless, international rice trade volume more than tripled between 1978 and 2008.

Recipe for establishing a successful international rice futures market

Liquidity
Liquidity is the key to a successful futures market. Without adequate liquidity, a futures contract cannot be used as an effective tool for hedging and the market will be exposed to manipulation. In addition, the price discovery role of a futures market will be compromised without adequate liquidity. Prices for Thai 5% and Vietnam 5% rice correlate with the majority of common rice traded in Asia. This will allow for hedging against a majority of the white and parboiled rice traded in the global market. Apart from quality specification, the viability of futures contracts also depends on size and delivery points. Contract size must allow the majority of traders and investors to directly participate in the market. An ideal contract size in a Singapore-based international rice futures market would be 10 to 20 tons. The few futures contracts not offset by their expiration will have to be settled by physical delivery of the product. In addition to designating a few warehouses in the region, it will be convenient to also identify some major ports, such as Singapore, Bangkok, and Ho Chi Minh City, where sellers can deliver their product free on board at the receivers vessel.

Regulatory framework

Contract specification and delivery

Because rice is politically sensitive in Asia, independent organizations must take the lead to bring stakeholders together, and develop regulatory and policy frameworks for market operation and to protect participants against fraud, manipulation, and abusive trading practices. The International Rice Research Institute (IRRI) and the Asian Development Bank are well placed to do this. IRRI already has a presence in Singapore so it could pursue this immediately.

Trading platform

Electronic trading platforms, on which bids and offers are matched in a central data processor and transactions are made in a split second, are more cost-effective and efficient than traditional pits and an open-outcry system. More importantly, electronic trading allows the masses to participate in trading and this is likely to increase liquidity in the market, which is essential for the long-term success of a rice futures market. Such a platform already exists for other commodities in Singapore.

Outreach program

An innovative outreach program needs to be developed to educate the farming community, processing companies, traders, and other potential market participants on the use of a futures market to hedge the price risk they face.

Growing demand for rice

Rice is the staple food for more than 3 billion people, with 90% of it produced and consumed in Asia. It is also the staple food of the worlds poor. Ensuring an adequate and affordable supply of rice is essential to ensuring food security and alleviating global poverty. In 2010, the world produced 440 million tons of rice. To meet the worlds growing demand for rice and to keep it affordable for poor rice consumers, in 2035 we need to Produce a total of 555 million tons of rice. Produce 115 million tons more rice than in 2010. Have produced 810 million tons more rice every year. Have increased rice production by 25% in 25 years. Provide Asia with 67% more rice. Provide Africa with 130% more rice. In addition, the likely expansion of rice production into environmentally suitable areas in Africa and Latin America will guarantee growing international trade in rice. In the face of growing water shortages, increasing frequency and intensity of extreme weather, and emerging pest outbreaks, it is essential that the global rice market be stable and efficient in handling increasing fluctuations in rice production.

Source: IRRI estimates

IRRIs involvement
Credibility
IRRI would bring a unique, unbiased, and overarching credibility to the functioning of an international rice futures market in Singapore. This would build the confidence of foreign market participants against fraud, manipulation, and abusive trading practices.

The International Rice Research Institute

IRRI is a nonprofit, independent organization that, through rice research, aims to Reduce poverty and hunger. Improve the health of rice farmers and consumers. Ensure that rice production is environmentally sustainable. We have expertise in policy development to improve rice supply and trade, and in providing rice production information to inform markets. The IRRI Fund, Singapore, supports IRRIs research by promoting and facilitating investments in rice research. Our funding comes from donors worldwide who support our mission and goals.

Outreach and training

IRRI can develop innovative outreach programs to educate the farming community, processing companies, traders, policymakers, and other potential market participants on the use of a futures market to hedge the price risk they face. IRRIs relationship with national agricultural systems and its long-term experience in training and capacity building make it a leader in this area. IRRI can also provide educational materials on starting futures trading, including basic understanding of a rice futures contract, risk involved in futures trading, fundamental and technical analysis of the market, and trading strategies.

Research reports

IRRI can provide independent and unbiased monthly global crop condition reports and global rice supply and demand estimates. The Institute has field-level data on current crop conditions, disease problems, and other issues affecting rice crops, such as technological and varietal developments, in various rice-growing regions. IRRI is already developing rice crop production monitoring and forecasting systems for selected countries by combining modern techniques such as satellitebased remote sensing with weather and crop modeling.

Research support for global food security

Global trade in rice is made possible by production surpluses in some countries. These surpluses are due to dramatic yield increases a direct result of investment in international rice research, especially IRRI. Such research must continue for surpluses to be reliably available for trade. Historically, Western countries have supported this research. However, a more reliable and logical research funding stream would be the international trade that this research makes possible. IRRI proposes that a small users fee be charged for each trade to support international rice research. This fee would go to the Singapore-based IRRI Fund, a registered nonprofit international charitable organization. The IRRI Fund uses funds it receives to facilitate and encourage support for international rice research particularly the work of IRRI. The fee would be used to support international rice research to revitalize rice yield growth in a sustainable manner to help fight global poverty and food insecurity. This will also help ensure adequate availability of rice to support the viability of the futures market through expanded trade. IRRI would also generate timely reports on the status of the rice crop in the main rice-producing regions to support the smooth functioning of an international rice futures market. Research support fees are common for agricultural commodities in the United States and other developed countries. These have existed for decades, with producers and importers contributing a small amount for the development of improved production technology, for example, the nationwide U.S. Soybean Checkoff Program and U.S. state-based corn checkoff systems. Checkoff programs operate in many rice-growing states in the U.S., where major shares of the collections go toward developing improved production technologies. Since 1963, Colombia has put a 0.5%-of-sale levy on rice to support public rice research and development. Commodity exchanges commonly levy a number of small fees for similar purposes.

CONTACT: Dr. Samarendu Mohanty +63 2 580 5600 (2722) s.mohanty@irri.org

www.irri.org