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Face of rice price not just another pretty chart

Face of rice price not just another pretty chart

China may have a problem growing enough rice and part of that problem is a shortage of water, says rice analyst Milo Hamilton. This is one reason why about 13 percent of China’s water needs are imported as soybeans. The biggest user of water is their rice crop. Milo Hamilton will be available to discuss rice prices and other market factors at the Mid-South Farm and Gin Show, in Memphis, March 2-3, Booth 4017. 

Editor’s note: This is part one of a two-part article on rice prices. Hamilton will be available to discuss rice prices and other market factors at the Mid-South Farm and Gin Show, in Memphis, March 2-3, Booth 4017.

A lot of folks are now writing with great assurance about where the rice price is headed. A lot of analysis has been piled on top of Chicago rice futures by good grain market analysts who try to be experts on rice. Their customers demand coverage of five row crops for the price of one subscription.  However, rice is not just another pretty grain.

Rice trades less like a grain and more like a vegetable. It is consumed largely in the form it is grown on the farm. It is not crushed, extruded or pulverized into flour generally speaking. What comes out of the field lands up on someone’s plate or in a rice bowl. You cannot say that about corn, beans or wheat.

What is troubling to me is that U.S. long grain exports as a percent of total use have been declining over recent years versus medium grain, whose market is gaining exports as a percent of total use. I do not know why that is the case, but it troubles me. I prefer bull markets based on demand growth not supply shrinkage.

My current business mission as a rice market advisor is to make everyone a rice market force. Futures are moving us in that direction. In August 2006 every farmer grew an electronic finger and no longer needed to go to the rice pit to buy or sell. The concept of a “fast market” became an artifact of history. The electronic platform makes each customer of the exchange more of a market force.

To understand the rice price, you need to understand Asia and how rapidly it is changing.  In January 2012, over half the population in China became urban. In 20 years, that figure is expected to rise to 75 percent. In 1981, when I began trading rice, only 20 percent of China was urban.

If you farm rice as a way of life, it will get expensive quickly. If you farm rice as a business, it can be a rewarding way of life. In the future, if there are no businessmen rice farmers in China, those cities will starve. That I can forecast with absolute certainty and I do not need a pretty price chart to say that.

By 2032, demographers predict that just one rice farmer in China will feed three other people. This could be the single biggest social change in the last 1,000 years, in rice for sure and perhaps in the financial history of the world. Unlike Japan, China’s rice consumption has been flat to rising a bit.

Inside Japan, rice prices are many times higher than other food traded in the world. If you stick it to rice consumers on price or quality, they will grudgingly change their eating habits. The common perception in the West is that Asian countries stop eating rice when they become “westernized” may be a little false, at least for China.

China may have a problem growing enough rice and part of that problem is a shortage of water. In China, it takes five to 20 times more water per unit of GDP as the industrialized West. This is why about 13 percent of their water needs are imported as soybeans. The biggest user of water is their rice crop.

China would prefer to eat its own rice and protect its market from outside forces. That is why the price of rough rice in China is over $18 per hundredweight. Can you make money by growing rice in Arkansas for $18 per hundredweight? I would hope so. In India the rough rice price is about $8.50 per hundredweight.

So the cash price of rough rice price in Asia depends on whether you live in India or China. What does all this have to do with Arkansas cash and U.S. rice futures? Quite a bit actually.

On the futures side, a lot of folks have expended a lot of energy attacking the rice futures market recently in the United States as a disconnected and dysfunctional thing that does not converge with cash.

We must be careful of any changes we make to the rice futures contract to yank cash and futures together. If folks succeed in getting rid of rice futures by the wrong contract changes, darkness will again descend on U.S. rice farmers as quickly as night follows day.

On the cash side, the U.S. rough rice price is largely determined by the Mississippi river bid, which has been almost extinct for months. That is why I am currently forecasting long grain rice acreage down by about as much as 14 percent or more in the South in 2012 and long grain acreage between 2010 and 2012 could be down over 1.3 million acres. Stocks of rice in 2012-2013, at least for long grain rice, could be the tightest on record. Farmers were recently asking me, “Why plant a crop with no bid?”

The major force determining the flat or cash price of rice is export demand as rough rice to the Central Americas and Mexico, which are rice importers. On the supply side, the other force setting the Arkansas cash rice price is South America, which is a net rice exporter. When the price in South America was high in 2009, so was the U.S. price. When that price collapsed in 2010 and 2011, so did the U.S. price. North American rice prices are driven by South American rice prices.

The rice futures contract is a futures market that sort of tracks a cash market made in the Americas, more or less, not just Stuttgart, Ark.

Unlike the cash market, the rice futures market is largely driven by the commodity funds, many of which are located outside of the United States, many in countries like Singapore where everyone thinks he is a rice market genius. Asian speculators will buy U.S. rough rice futures because the Thai price just has to go up. Or they will sell the market to a record short position because they think India will pound world prices into submission. I do not agree with their analysis but the man who has the gold makes the rules.



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