Singapore Mercantile Exchange hunting agricultural commodities

V Hariharan, CEO of the Singapore Mercantile Exchange

Set up in 2010, the Singapore Mercantile Exchange, a pan-Asian commodity and currency derivatives exchange, is now hunting for more agricultural commodities from black pepper in Vietnam to rubber in Thailand, to become the regional centre for agriculture futures transactions.

SMX last month signed a memorandum of understanding with the Agricultural Futures Exchange of Thailand to include rubber futures in its trading platform, following similar deals with Vietnam and Indonesia, which are famous for their black pepper and palm oil.

“Under the MoU, we collaborate on the broad-based agreement to make contracts global,” CEO V Hariharan said during an interview in Bangkok. “We hope to launch more such Asia-centric contracts adding to the list of products being offered by SMX that can be established as Asian benchmarks for prices of commodities being predominantly consumed and/or produced in Asia.

“You should be the price-setter, not let it be set by someone else. You should be the price-setter for the commodities.”

It makes more sense for Asia to set prices for its own products, instead of letting that responsibility fall in the hands of investors in the other parts of the world.

While Argentina is the major global supplier of soybeans, the soybean price is set at the Chicago Mercantile Exchange, the world’s largest. Likewise, while Thailand is the world’s largest supplier of rubber, but the price is also set in Chicago.

New contracts will boost the range of products provided by SMX, and through SMX, which is one of the 58 members of the World Federation of Exchanges, farm products from those countries can be tradable to investors across the world from the United States to Japan. This would free the products from price cycles, when prices fall at the end of the harvest season and rise when there is no new output.

More agricultural commodities mean more farmers would be guaranteed of demand and know about the future prices of their crops. Corn, rice, wheat and cotton dominate the market.

Commodity futures are being used by traders as a hedging tool, with less than 5 per cent of commodities physically delivered.

Black pepper futures, with black pepper from Vietnam as the underlying asset, became tradable in Singapore in February 2012. It was dubbed as the world’s first black pepper futures and is the first commodity futures on the Singapore-based exchange, which is keener on currency derivatives. Farm commodity trading is still sluggish due to the higher prices of other commodities like gold and oil. However, the volume will grow. Black pepper futures and E-gold futures based on Indian gold prices helped SMX achieve turnover of over US$71 billion in 2012.

With over four million contracts traded on the exchange since its launch in August 2010, the end of 2012 saw cumulative turnover of over $134 billion since SMX went live. During 2012, the average daily volume was over 8,200 contracts, with the peak at 30,075 contracts.

Despite the low volume of farm futures, “it’s a good financing mechanism for farmers and it’s good for the economy”, Hariharan said.

More products will make SMX the true regional hub for derivatives, putting it on par with global exchanges that are competing for trade via niche products. Thailand Futures Exchange offers gold futures, but they are traded in Thai baht not in US dollars as at SMX. In Hong Kong, the exchange is famous for gold and yuan, but farm products are not Hong Kong’s focus.

“We can work together to find the products that benefit both exchanges,” he said, referring to the collaboration with Thailand’s exchange.

Besides rubber, there’s a possibility of including ethanol, sugar and tapioca from Thailand, he added. The products will then reach global investors, allowing the Asian exchange to set prices for commodities cultivated in the region.

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Singapore Mercantile Exchange hunting agricultural commodities