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A common tool as a price-movement indicator in order to make decisions in daily trading for five RBI types is the price in the TOCOM market (for more details see Section 6.5.3.1). Therefore, RBIs were faced with a similar price volatility. It is interesting to note that the implications of any price movements were different, even amongst the same kind of RBIs. This was a consequence in terms of the differences in the time of their business cycles and levels of ease in product marketing or price risk hedging. For instance, Latex-USS intermediaries may spend ten days processing latex into USS before the USS product could be sold, while latex intermediaries commonly trade their products within a day. The following sections are dedicated to the impact of NR price risks on different RBI types, as shown in Figure 5.7.
5.4.1 USS Business Intermediaries
There is a mixed level of price risk impacts amongst USS RBIs. One of the USS RBIs who seems to be successful in dealing with price volatility expressed the view that:
(APPX_T_547).
Another USS RBI supported the above statement and supplemented it by saying that price movements have to be based upon fundamental factors (APPX_T_548).
RBI21 agreed that RBIs have to rely on price volatility, but argued that too much volatility might lead to the dysfunction of available PRM instruments. He recalled that:
(APPX_T_549).
He also experienced a situation in which the price plummeted and he held NR product stock at a processor’s warehouse (APPX_T_550).
On the other hand, a USS RBI who had suffered from price fluctuations commented:
(APPX_T_551).
5.4.2 Latex Business Intermediaries
Latex has a shortest business cycle amongst five types of NR business. It is considered as a daily trading business. As a consequence, it has a tendency to be exposed to less price risks. PRM is rarely needed in this business. RBI02 said: (APPX_T_552).
However, another latex RBI added that the market competition might force her to take a price risk by buying at a high price which might then turn the transaction into a loss
(APPX_T_553).
5.4.3 Cup Lump Business Intermediaries
Like the USS business, cup lump intermediaries’ business also relies on price movements. Consequently, cup lump trading also has a significant impact from price volatility. One of the cup lump RBIs stated that: (APPX_T_554). Moreover, as the cup lump grading system is by graders’ sight, it is not reliable as a scientific method in the latex industry,
Another cup lump RBI explained that if price movements are at low levels, it may attract new competitors into the market (APPX_T_555).
5.4.4 Latex-RSS Business Intermediaries
Unlike USS and latex RBIs, Latex-RSS require a lead time in processing before they can market it as the RSS product. Therefore, price movements in this period directly impact upon their business performance in terms of gains or losses. One Latex-RSS RBI stated:
(APPX_T_556).
Latex-RSS RBIs were not exposed to only the price movement of a single product, but two different products - latex and RSS. Therefore, they are exposed to both price risk and price basis risk between them. For example: (APPX_T_557).
It is unsurprising that Latex-RSS RBIs are negatively affected by previous price volatile periods. Another Latex-RSS RBIs commented: (APPX_T_558).
5.4.5 Latex-USS Business Intermediaries
Similar to Latex-RSS intermediaries, Latex-USS RBIs were exposed to the price movements of two NR products. These are latex and USS. However, Latex-USS RBIs have a longer business cycle time than that of the Latex-RSS RBIs. They tend to be exposed to a higher possibility of price changes. This may be compensated for with the ease of USS product marketing. A Latex-USS RBI commented: (APPX_T_559).
5.5 Chapter Summary
The NR markets have changed in several aspects in recent years. Prices were more volatile and more difficult to be forecasted. As a consequence, the relationship between NR supply chain players changed to become wider, especially between RBIs and NR processors, and between RBIs and NR farmers. Despite this, RBIs depends upon the volatility of price to generate profits, and therefore they are likely to suffer from high price volatility. They are unable to manage their business effectively during such periods of high price volatility.
There are various factors that RBIs believe to be the sources of increasing price risk in NR markets. These are the introducing of futures markets, growing competition in the market, the NR market becoming financialised, the improvement of communication technology, the surge in demand from China, and the impact from speculators.
In terms of price formation, RBIs believe that NR price movement is influenced by supply, demand, financial market, political situation, its stock, and production costs. For the medium- and long-term price movement, demand and supply play a crucial role.
Some RBIs make their trading plan from medium-term price expectations. However, the majority of them rely upon the shorter term, being highly influenced by financial markets to guide their trading. The financial markets comprise of NR futures, stock and other commodity markets, and currency exchange rates.
As most NR farmers are small farmers, it is unsurprising that there were some periods of price intervention schemes from the Thai government. The price intervention distorted the price mechanism between domestic and world NR markets. NR stocks can both positively and negatively impact on NR price. Finally, the cost of NR products partly affects price movements as some farmers, mostly large NR plantations, have the ability to stop producing NR during periods when NR prices are lower than production costs. As a consequence, lower supply may lead to an improvement in price.
The influences of players in the NR markets are varied as currently the market has been highly influenced by the financial market. There are several futures markets where NR is listed. Therefore, traders, such as speculators and hedge funds, highly influence the market as they are simply able to participate in the market. Although exporters are less influential on price movements than hedge funds, they are the main players in the market as they consistently participate in the market and have superior supply and demand information, especially supply. Some of them have an established trading department to monitor and manage price risk for their physical trading. It is unsurprising that RBIs believe that exporters are the most powerful players in the domestic market. The NR market has been well-known for long time to be a market of the user since there are several big users relative to millions of small producers. The sourcing behaviours of NR users have a high direct impact on exporters’ sourcing prices. The exporters who receive orders tend to offer higher buying prices than who do not. Additionally, politicians have effects on NR prices in terms of price support to NR farmers, their voters. They often become involved in the market during the low price periods. Regarding RBIs, they may also have power over price movements due to their selling behaviours, but not all of them have that power. Big RBIs are likely to have more powers than smaller ones, as trading volume means power in this market. It is worth noting that the majority of RBIs are small. Finally, the group with the lowest market power in the market and least influence on price movements are the farmers, although some big plantation owners have some ability in managing their supply.
In summary of price risk implication on RBIs, a longer business cycle tends to expose the trader to a higher chance of price changes. This may have a severe impact on RBI
effectively. Moreover, ease of marketing NR products is another factor that indicates the level of impact of price volatility. The product that is easiest to resell is likely to be affected less by unfavourable price movements.
Having presented so far the research findings on price risks in this chapter and supply chain structures based on types of RBIs in the previous chapter, in the following chapter, the research findings with regard to NR PRM strategies in practice are revealed.