In late February, while most major commodities were extremely bull-friendly, Carl Brothers was wary of rice. Among the reasons: too much supply, too few exports, and too many quality concerns.

“When looking at rice production around the world, the United States is (responsible) for less than 2 percent,” said the Riceland senior vice president, market and risk management, at the Mid-South Farm and Gin Show. “That’s quite different than with corn, wheat, soybeans and cotton. So, prices for rice are really made in Asia.”

In 2004 and prior “we were carrying over 35 percent in the stocks-to-use ratio. The world was afloat in rice. Thai prices were $165 per ton. We were experiencing a loan deficiency payment — in a period I call ‘loan economics.’”

The landscape has since changed. Around 2008, “stocks plummeted” and “prices skyrocketed. Thai prices went to $1,000 per ton.”

Currently, Thai prices are around $530 to $540.

“Farmers often tell me ‘prices aren’t up.’ Well, prices are up — but you’re getting more money from the commercial market and less from government benefits because there is no counter-cyclical payment. The stocks-to-use ratio has stabilized some.”

Last summer, “we had record rice acres — particularly in Arkansas (with 1.79 million acres) and Missouri (253,000 acres). Pressure came on and U.S. prices, for the first time in some time, went below Thai prices. Immediately, in the late summer, we sold 120,000 tons to the Iraqis and displaced the Thais there.”

Unfortunately, record acreage doesn’t guarantee a stellar crop.

“The harvest was very disappointing. Not only were the field yields disappointing but the milling yields and quality were very poor. In fact, I’ve been with (Riceland) for 46 years and it’s the worst crop we’ve handled. We’ve had more difficulty with the (2010) crop with our customer base, with our milling operations, than with any crop I’ve experienced.”

Now, “we have less rice on hand because of the yields and milling yields. The rice prices rebounded. Also, corn, wheat, beans and cotton were exciting and futures were running. But the cash didn’t really follow and that’s what has created the wide basis we see today.”

But as U.S. rice prices increased, “we missed the last three Iraqi tenders. And we’re really falling off the pace needed to move this crop.”

Brothers admitted to being “pretty negative on rice. Some of the materials I’ll use this morning date back a couple of weeks when Chicago Board of Trade (CBOT) prices were much higher than today. We’ve seen a dramatic adjustment.”

Looking at balance sheets and fundamentals, “you’ll see that rice is trailing the other crops in bullishness.”

Long-grain/medium-grain

The breakdown between long-grain and medium-grain shows a bit different picture. Arkansas raised 1.79 million acres in total. Louisiana rice acreage was up about 13 percent, Mississippi was up 27 percent, Missouri was up 25 percent, Texas was up 11 percent, and California was up 1 percent. Overall, the nation was up 16 percent.

“It was a huge long-grain rice crop. And we not only increased rice acreage but we pulled back from planting medium-grain.

“That surprised me a bit when looking at California and the strong medium-grain prices. And, to some extent, there have been strong medium-grain prices over the last couple of years in the South. In the coming year, I think we’ll see less total rice acres and more medium-grain acres. That’s the talk I’m hearing out there.”

In 2010, Arkansas was down 13 percent on medium-grain production to 196,000 acres. Louisiana was down, as well.

Several years ago, “there was a lot of contracting that stimulated some of the increase of (medium-grain rice) production in Louisiana and Arkansas. That contracting has slowed and that could be what is influencing the reduction in acres.”

The medium-grain/short-grain production king is California at 563,000 acres. “And they’re on fire, these days. Prices there have been wonderful. The WTO opened the Japanese/Taiwan/Korean markets and the rice grown in California suits those markets very well.

“I often remind our growers that our medium-grain rice needs improvement. We have a very poor medium-grain quality compared to California. We need to improve medium-grain varieties — and I know that’s being worked on.”

The USDA’s NASS estimates Arkansas’ average 2010 yield was 144 bushels per acre — down 5 percent. NASS was “carrying much higher production-per-acre (figures) earlier and reduced it twice as we moved into the crop and realized how disappointing it was.”

For all rice — long/medium/short — U.S. production was “540 million bushels. That’s a 10 percent overall increase and overall supply is up 11 percent when considering we carried in 21 percent additional rice. Total use is up 5 percent and we’re carrying out 43 percent more rice than we were a year ago.”

For medium-grain, “the carryout is down 33 percent. It appears to be a continuing healthy situation with (medium-grain) prices projected at $7.65 compared to $8.28 a year ago.”

Milling

2010 milling “got off to a fast start. We sold to Iraq early and millings were at record pace. We’ve since fallen off. At one point, overall millings were over 20 percent from a year ago. We’re now down to 17 percent. Medium-grain is up 12 percent and long-grain is up 19.”

Brothers projected that long-grain decline will continue “without more export sales on the books. At Riceland, we’re already beginning to cut back.”

In its Dec. 1 report, the USDA long-grain stock number came in at 273 million bushels — up 19 percent. That’s led some to suggest the crop is overstated.

Brothers disagreed. “When I look at projections of the crop and the increase — and the disappearance of the crop which should have been massive between harvest and December (and it’s still up 19 percent on stocks) — that doesn’t suggest to me that the crop is overstated.”

Export sales have seen change over the last few weeks.

“By law, anyone who sells into the export market must report their sales immediately. … There is a published report that comes out weekly. (The Feb. 10) reports shows long-grain milled rice is up 17 percent — still looking fairly decent.”

Meanwhile, long-grain rough rice is down 8 percent, something Brothers said “is a bit of surprise when thinking about the poor milling yields. It takes more rough rice to create the same amount of fancy, or head, rice. And the fancy demand generally drives the market. … I think the rough rice market will come back and be virtually unchanged from a year ago.

“Again, this is from the Feb. 10 report. But go back to the report from Nov. 11, and milled rice was up 72 percent, rough rice was 29 percent and, overall, we were up 46 percent.

“We fell off a cliff in additional reported sales since November. This is feeding into why the basis has widened — you can’t pay more for rice than you can turn around and sell it for. And it’s obvious we’re having a hard time selling rice at these higher prices.”

How big a drop in new crop acres is needed for Brothers to change his opinion on old crop rice?

Because of the quality issues, “I think we could still be under pressure … right up until we get the new crop price. People in the industry are already saying that they don’t want any old crop rice delivered…

“The quality isn’t there. The milling yields are poor. … The stink bug damage in this crop was horrendous. Most of the stink bug damage is running somewhere between 2 and 14 percent…

“So, I think it’s very unlikely the old crop will get a lot of benefit from new crop prices.”

Basis

A common irritant for producers is basis. Brothers said on Feb. 2 “futures were at $16.17. I looked at many angles on what the cash price was — I used the mid-range price (of $12.50).

“The simplest thing to say about basis: the difference between what the futures market says (a commodity is worth) and what you can sell it for, cash. Cash will often rule.” So, for the figures cited above, “the implied basis is $3.67. At that time, Riceland was at $3.30 — very competitive with what was going on.”

Another factor in the rough rice price “is something I don’t hear a lot about. But if you go back to 2009, our average long-grain milling yield was 61/70. (That means) if you have 100 pounds of rough rice, 61 pounds is ‘fancy’ rice. The difference between 70 and 61 is 9 — that’s your brokens. The difference between 70 and the initial 100 pounds is 30 pounds — about 10 pounds of bran, 20 pounds of hulls.”

In 2009, the industry saw exceptional milling yields at 61/70, “some of the best yields I’ve seen in my career.”

Conversely, in 2010, “we saw the worst millings I’ve seen in my career. The average long-grain milling yield is about 51/66.”

With a 51/66, “there aren’t many premiums. The discount on a loan value is 25 cents. There is nothing the producer or (miller) can do about that. That’s 25 cents per bushel coming out of your pocket.

“But if you go to the cash market … and revalue the (past) two milling yields, the real impact to the marketplace is 75 cents per bushel. My point is, if the miller is discounting you 25 cents and is realizing a 75 cent discount in the market, he’ll try and pick that up in the basis.

“So, right there, is 50 cents per bushel over $1 hundredweight of the basis that’s just in that milling yield disparity.”

What about the same calculations for medium-grain? “In 2009, it was a 62/69 and this year it’s a 52/66. Normally, you’re discounted at loan value, which is 21 cents. But the buyer of the rice is taking more than an 83 cent-per-bushel discount when merchandising into the cash market.

“Someone said, ‘why doesn’t the Rice Federation do something about this basis?’ I think you have to be very careful with that. In my opinion, futures are too high. … If you take futures down and get blamed for a lower price, you’re in trouble with the farmer. I keep saying to the Federation and anyone who’ll listen: ‘this will take care of itself. Just give it time.’”

In 2008, the Thai price was $1,000 per ton ($45 per hundredweight). The CBOT price, at that time, was at a high of $24 per hundredweight. However, the ratio between milled and rough rice was 53 percent.

“All I’m doing is dividing the $45 into the $24 for a ratio. Coming forward to Feb. 3, 2011, the Thai price was $530 per ton ($24 per hundredweight on a milled rice basis). The Chicago futures were at $16. Now, the ratio is 67 percent.”

If 53 percent was right in 2008, said Brothers, “then 67 percent can’t be right in 2011. So, I come forward and say if you take the Thai milled rice price at $24 and use that 53 percent ratio, the CBOT price should be $12.70.”

The last week of February, rice futures hit $13.25. “I’m not sure futures won’t go lower. I think this is a low range as long as the Thai price stays at $530. … I know that’s not so friendly to rice, but it’s what we’re dealing with.”

Crops coming

What about 2011 U.S. rice acreage? “Numbers I’ve seen project Arkansas to be down 19 percent, Louisiana down 34 percent, Mississippi down 31 percent, Missouri down 27 percent, Texas down 15 percent and California down 8 percent.”

Brothers disagreed with only the California prediction. “I think California will be back at the normal 550,000 to 600,000 acres. They have adequate water, good rainfall. I’ve talked to people out there and there’s no disagreement that the 525,000 acre projection is too low.”

Meanwhile, it appears good rice crops await harvest in Asia. “The Thais are just about to harvest their second crop (the country’s major export crop), the Vietnamese will harvest soon, and the South Americans appear to have a good crop. We see more competition coming into our marketplace over the next few months, rather than less. I am concerned.”

Looking at stocks-to-use ratio, corn is at 5 percent (“extremely low”), wheat is at 33 percent (being driven largely by problems in Russia), and soybean is at 4 percent (“really strong”). Long-grain rice is at 24 percent, medium-grain is at 12.7 percent.

Rice “just doesn’t have the same strong fundamentals being seen in the other crops. I wish it did.”

Opportunities

Current opportunities for U.S. rice compose “a mixed bag. In Iraq, we’ve missed the last three tenders — they’ve gone to South America, to Vietnam, to Thailand. The Vietnamese and Thais, particularly, have a freight advantage on us. We need some of that Iraqi business, in my view, to disappear this crop.”

However, exporting poor-quality rice to reliable customers could bite the United States. Brothers pointed to Haiti as an example. “There is a vessel now loading out of Uruguay that is going to Haiti. It has my attention for two reasons: one, it’s cheaper than what we’re currently selling; and, two, the quality of the South American crop is good. (Meanwhile), we have some of the worst U.S. rice I’ve ever seen.

“I’m worried that when that rice hits, the Haitians will get very upset in the difference between South American and U.S. rice. It couldn’t be a worse time for Uruguay coming into the Haitian market.”

Brothers lamented the lack of movement on trade with Cuba, potentially significant importer of U.S. rice. Brothers and colleagues were recently in Washington, D.C., where “we talked to everyone we could (and Cuba) came up at every turn. Everyone says it should happen — but it just keeps not happening.

“We thought (with) President Obama’s election … we had our best opportunity to open up Cuba. It hasn’t turned out that way. Forces are just more powerful, apparently, than we realized. I don’t know what we’re going to do.”

China is more of bright spot, said Brothers. While unlikely to buy “a lot” of U.S. rice, “there is a segment in China that will buy ‘luxury rice’ — nicely packaged, good quality rice. … But China doesn’t have a phyto-sanitary protocol with the United States. Right now, it’s illegal for us to ship rice to China. That makes no sense. As much as we import from China, we can’t get a phyto-sanitary protocol resolved?

“I’m told it’s over (a) beetle. We’ve heard that packaged goods have come into the United States from China where the beetle has been found in wrappings.”

Nigeria is another positive for U.S. rice. “The Indians have put a ban on exporting rice. They were a big player in parboiled rice in Nigeria. That has forced the Nigerians to return to the United States for parboiled rice.”

Brothers closed with news that the USDA is investigating potentially illegal Brazilian rice subsidies.

“I was first aware of that about a week to 10 days ago. … It was reported to me that it’s an export subsidy, which is illegal. We said, ‘we can do them (on this), what they did to cotton if we can prove it.’

“I’m told it’s $60 per ton … (and is) under investigation by the USDA, at this moment.”