Pronounced roughly "kOOn", it effectively means "you" in Thai. It's quite polite, and to include it in front of someone's name in correspondence shows both respect, and a modicum of cultural awareness. It also explains why you'll sometimes hear Thais yelling "You! You!" on the street if they want your attention. It sounds rude to us. It isn't at all.
Exactly how to address somebody in Thai is rather complicated; a complex mélange of age and social status. For example, to summon a waiter or waitress, you might use "nawng" (younger brother/sister) or "Pi" (older brother/sister). The 3rd person (viz. him/her) is man, but it isn't often used because it's lowly — used for animals for example. So when I heard Thais introduce Kathy and I, they would say "Khun Scott"if I were next to the speaker, then "Khun Tii" ("you at") cheu [name] Khun Kathy. Confused yet? There are different honorifics for Professors, for Monks — and a unique set of descriptors used only for speaking to members of the royal family, who are held in the highest reverence in Thailand.
Thais traditionally do not shake hands, they wai. To wai involved bring the hands together in front of you in a praying position. Trouble is, in the Thai culture, there is a social status between any two individuals (for example, older people have more status than younger; monks have more status than laypeople, foreigners (who are assumed to be rich) have more status than most Thais. How "high" one wais (how high you bring your hands), how deeply (if at all) you bow your head, and when (lower status generally first) -- all depend on your relative status to the other person. You're not suppose to wai service people (flight attendants, waiters, for example) -- you wouldn't tend to shake hands with these people in the west.
What's a farang to do? This all comes quite naturally to Thais, as it is an intrinsic part of their culture. But it is quite difficult as a foreigner, to know how -- and whether-- to wai. There are two schools of thought on this: 1) To not return a wai is rude, not unlike refusing to shake an outstretched hand. 2) You can't possibly get it right so your reaction will seem bizarre to the Thai.
My take on this is that you should always acknowledge a wai; and a smile and/or nod will do nicely. Having been to Thailand many times and established a few "closer" (than you'd normally have with waitstaff etc.) relationship, the few times that I've wai'd seem to come naturally and spontaneously.
Another interesting word in Thai, this one is an adaptation of the Thai pronunciation of the word "France". It's a stretch, but the distance between Thai and French is a least as far as the distance between Thailand and France.
Farang now refers to any foreigner. Like terms we may use for other ethnicities in English, whether this is derisive or not depends completely on how it's used.