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Rice: Don’t sell and walk away from the market

In the past I have written about the impact of energy costs and a strong Asian price on the U.S. rice farmer. Energy costs over the last two years have raised the production costs of U.S rice farmers by at least $1.75 per hundredweight. The other fly in the ointment is the rising price of Asian rice and of Brazilian rice as well, which affects both medium and long grain prices globally.

As Asian prices rise, the amount of loan deficiency payment (LDP) to the farmer decreases. The LDP is one of two variable subsidies for rice. I expect that the LDP may be zero next year because of strong prices in Asia.

Our measure of rough rice prices in key trading countries is at about $8.50 per hundredweight or about $2 per hundredweight over the U.S. loan rate. I expect that level in Asia to rise, not sink in the next six months.

The other variable subsidy is the counter-cyclical payment. It is can be as high as $1.65 as it is calculated at the difference between a $10.50 “target price” and $8.85 per hundredweight.

It has been declining since the 2002 crop, when it reached the maximum of $1.65 per hundredweight. It is forecasted to be about 52 cents per hundredweight for the 2005 crop and perhaps zero next year.

For the 2003 crop, another bull market year, the counter-cyclical payment was only 7 cents per hundredweight due to very strong rice prices in the United States.

At the same time, Asian prices were weak and the LDP very generous. In fact, in November 2003, the LDP was a whopping $2.60 per hundredweight and a farmer would have received a total price of $7.82 on a $5.65 per hundredweight futures price.

The 2004 crop was even more generous than the 2003 crop to U.S. long grain rice farmers. If you hedged the 2004 crop on March 15, 2004, in 2004 November futures (the market closed that day at $9.05 per hundredweight), you could have pulled down a total return of about $10.30 per hundredweight, not bad for government subsidy work.

The rice LDP is tied to prices outside the United States via the world market price; the counter-cyclical payment is tied to prices inside the United States, which are driven by local stocks and world prices as well.

I believe that over the next 12 months the U.S. price for long and medium grain rice will average well above $8.15 per hundredweight. So I forecast no LDP in 2006-07 and most likely no counter-cyclical payment next year.

Medium grain prices in California should average at or above $11 per hundredweight, for example. Medium grain is a major price component that determines the annual counter-cyclical payment.

How generous is $9 nearby futures this season? Let us start with a $9 per hundredweight futures price, take off 80 cents per hundredweight for basis, $1.75 per hundredweight for the energy cost increase, which implies so far a $6.45 per hundredweight “real” price, net of energy cost increases.

As I stated above, incredible though it sounds, in 2004, a $9 futures picked up 82 cents of average counter-cyclical payment subsidy, $1.43 per hundredweight of LDP subsidy and the basis was around $1 per hundredweight under. The total net price received by a rice farmer in November 2004 was about $10.30 per hundredweight.

How much net return is a farmer likely to make in 2006 with the above market expectations? The difference between $9 in 2006 and $9 in 2004 is about $4 less to a rice farmer. Ask yourself the question — where will the $4 come from?

If the market needs the acreage that was cut this year, that $4 must come from Chicago rice futures. If the price does not go up, 2007 acreage will go down, not just a little bit but a whole bunch.

We calculate about a $9 price just for an Arkansas farmer to breakeven. Put another way, a real “energy adjusted” rice price of $6.45 per hundredweight just doesn’t make much sense or dollars.

If rice futures insist on staying at $9 and the Asian rice price does not collapse, then the market might be facing a very large cut again in long grain acreage in the South and much less rice left for export.

So my story about $9 rice losing $4 worth of benefit in the last two seasons can be summed up this way. The market goes up this crop year or it goes up a whole bunch next crop year. We are already trading 2007 futures with 2006 rice futures contracts.

Put another way, your entire rice returns this coming season may come from the market rather than rice subsidies for the first time in many years. Market your rice carefully. Ask your local buyer to buy your rice with a “stay in the market” type contract. You cannot afford to sell and walk away from this market this year or you may not return to farm rice again next year.

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