Commodity markets function in a complex atmosphere that includes the economic principles of supply and demand but also murkier layers of geopolitics.

The current situation for rice includes those issues along with a miasma of questionable reports, global turmoil, and violence.

Milo Hamilton, president and co-founder of Firstgrain, Inc., cut through some of the fog at the recent Mid-South Farm and Gin Show in Memphis.

Hamilton noted seven factors affecting the rice market—trade polarities, insecure trade routes, world price factors, production and transport costs, national priorities (weapons versus food), water, and U.S. advantages.

Breaking them down.

1. Trade polarization

“The world is split into trade polarities,” Hamilton said. “Globalization is done for a period. And we don’t have a supply problem or demand problem. We've gone from a world order where everything is interconnected to a group of trading partners. A nation can be part of a trading group, exporting food to certain people and perhaps not allowing partners to export to others. You must have a friend to export food to. Otherwise, you'll be left out in the cold as a nation.”

2. No trade routes secure

Hamilton said for some countries, piracy or state-sponsored disruptions threaten shipments of food and materials necessary for production. “Russia is trying to reduce the amount of wheat in the world by killing people. You have to have a friend to export food to; otherwise, you'll be left out in the cold as a nation.”

3. The world price narrative

“Every indication is that we have not finished this bull market,” Hamilton said.

India and China account for 51% of that market. The U.S. and the rest of the work account for the other 49%.

“China and India provide the floor underneath the market. But the rest of the world still matters because of the 49%.

India is about six times bigger than the whole Western Hemisphere.

Hamilton said new crop rice will trade at a discount, “from $2 to 95 cents this week (early March). What happens in the old crop will affect the new crop. Based on the discount on the old crop, the new crop should be lower probably by October or November.“Asia sets the floor in the market and western hemisphere trades on our own. The Indian price has gone up. I don't think the increase over.”

Hamilton said China’s stocks reports are at best questionable. “China remains the biggest food importer in the world despite reporting all adequate stocks. This year, China was the driest since record-keeping began in 1961, especially in the south where a lot of the long-grain rice is produced along the Yangtze Valley.

“China holds most of the world stocks of rice, wheat, soybeans, and corn. China's reserves and grain every year hit historic highs. What puzzles me about China is that it claims to have had bumper harvests for 19 years in a row. Do you know any agricultural area that has had bumper harvest for 19 years in a row? I know of none. You can lie for 19 years in a row, but you don't necessarily have what you say you have.”

Hamilton said U.S. domestic stocks are tight.

“Argentina's got a drought; we don't know how bad it is yet. Brazil will produce less rice and will carry over nothing this year; stocks are tight in South America.

“This market has not made its final move,” Hamilton said. “When it makes a move, it could be significant because the specs are super short.”

Movement could be as near as April but could be May, possibly as far out as August, he said.

4. Higher costs

“Your grain is more expensive because of fertilizer, fuel and shipping costs,” Hamilton said. “The good news for U.S. farmers is that urea and fertilizer costs are dropping, but that doesn't mean the market will continue to drop as demand comes back. This thing can reverse itself.

“We suggest rice farmers cover inputs as we move into spring.”

He said natural gas supply is at a very low level, and the price of Asian and European gas is still very high. “They can only store so much gas and this fall it could get very short.”

He said China needs to import nutrients and cost and availability will be factors. The cost of potash, phosphates, and urea could be related to problems in any one supply chain, including Russia, Ukraine and Canada. “It's not a demand problem, it's a supply problem,” he said. “The U.S., Brazil, and China need potash and the suppliers are Russia, Ukraine, and Canada.”

He said the U.S. has an advantage. “We have Canada nearby.”

Hamilton said poor soils in China, Russia and Brazil put a premium on the ability to source nutrients. “It takes four to five times as much fertilizer to get the job done in China as it does in the central U.S., the Grain Belt.”

He also noted that a recent outbreak of swine flu in China means they have one less commodity available to feed their people. “China will be very much interested in keeping as much phosphate as they can in their country. Without phosphate, they don't get the yields from the poor soils.”

5. War economy

“It’s not price but war and pandemics that have made buyers nervous,” Hamilton said. “The pandemic created unreliable supplies. And now the war in Ukraine is a significant threat. Russia will probably go after Ukrainian ag production as soon as they can get their tanks rolling. They will go after farmers; they will go after infrastructure, and I think they'll go after ports too, like Odessa. China might object to that.”

He said Russia wants to reduce global wheat stocks, push wheat price up so they can buy more soldiers and get more weapons.“We are watching China and Taiwan closely. Other countries will have to start defending their own borders and their own food supplies. Their budgets will shrink and financing farmers will not be a priority.”

6. U.S. Advantage

Hamilton said he is bullish for U.S. rice in the longer term, “all the way into 2024. Your grain could get more expensive.

“The U.S. will win big.,” he said. “It’s a dark forecast, overall, but it's a bright forecast for U.S. farmers. The U.S. has the currency reserve, so we can put the currency where we want to.

“Also, 60% of all navigable rivers in the world are located in the U.S., and river navigability cost is one-fifth to one-tenth of what it is for trucks or rail. This river right next door (The Mississippi) is one of the major benefactors for the U.S.

“So, 93% of our potash is imported, but it comes from — guess where, Canada. That's not very far away. For everything else, we're more or less self-sufficient.”

He said the advantages of fertile soils, close proximity to Canadian potash, and the workings of a mostly functional democracy bode well for U.S. agriculture, including rice.

7. Water

Hamilton said one other factor will be increasingly important in the mid-to longer-term — water.

“Within the next 25 years, it will become apparent to politicians that we can't export water. And grains are virtually water. We have about five times as much water as China, India and Pakistan. Those three should not be exporting water.

“Over the last 25 years, renewable supplies of water in all of these countries have gone down by anywhere from 14% to 25%. Assuming that continues over the next 25 years, by 2050 available global water supply will be down by 50%. Sometime between now and 2050, we will have water problems everywhere and politicians can't deal with it very well because taking a position on water means losing votes. That's not a good way to operate.”

In spite of world turmoil, Hamilton remains optimistic about the U.S, U.S. agriculture, and rice.

“I think the U.S. will do really well. We have an advantage with food and energy. I also believe the Western Hemisphere, currently with just 5% of the world’s rice production, will double or triple that number in the next ten years.”