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Rice is one of the cheaper basic commodities from a historical perspective, and many rice farmers in the US would add that at a recent low of less than $10 per hundredweight it had also fallen below the cost of production.
While a cheap price does not necessarily justify a major recovery rally, there are reasons to think that rice will be a consistent gainer into late 2010 and early 2011. In fact, rice has already started putting in what looks to be a significant bottom after pushing through the 100-day moving average on three occasions in August, the last time apparently for good.
A somewhat more obscure indicator, the rice/wheat ratio, may also be getting close to signaling a long term turn in the rice market. Rice and wheat are the two most basic food grains consumed by humans, with occasional switching between the two based on price or a lack of availability in one or the other. These two grains are also linked in many traders’ minds in the wake of the price shocks that took the markets to new all-time highs 2-3 years ago. This started with all-time highs in wheat in 2007, followed by further new highs in wheat and then rice during early 2008. Both markets collapsed during most of 2008 and on into June 2010 after the higher prices triggered increased planting and investment in production around the world.
Wheat again led the grain markets out of the starting gate with a rally in July and early August of 2010. This followed a series of weather problems that started with a cold and wet start to the growing season in Canada followed by an historic drought and heat wave in Russia, Ukraine, Kazakhstan and France and then an extremely wet harvest in Germany. Scattered smaller players from Eastern Europe to North Africa also experienced crop problems.
This rally in wheat drove the rice/wheat ratio down to near the low end of its range for the past decade. By late August, however, the world wheat supply and demand situation had started to stabilize, and the ratio began to correct. Part of this correction came from lower wheat prices, but some of the correction came from the rally in rice.
A look at the weekly rice-wheat ratio shows that it has a strong tendency to turn and trend, with these turns being especially sharp on the extreme low end of the historic range. Furthermore, the last two major lows in the ratio occurred in September and October. The question becomes whether the ratio has fully bottomed, and if it has, whether this will be accomplished via a further break in wheat, a rally in rice, or some combination of the two.
Several factors favor a rally on the rice side of the equation, including the emergence of scattered crop problems as well as its relatively low price. For example, the UN Foreign Agriculture Organization estimates that the recent floods in Pakistan may have reduced rice production there by 3 million tonnes, making rice the crop that was hardest hit by the floods. (The USDA lowered Pakistan by 1.2 million in the September WASDE supply/demand report.) In Cambodia, extreme heat and a lack of rain has threatened to cut rice production by nearly 2 million tonnes.
China, a far bigger fish than either Cambodia or Pakistan, saw a slow start to its rice production season with an early-season harvest at 31.32 million tonnes, down 6.1% from last year according to the National Bureau of Statistics. This was due to lower planted acreage and poor weather in the south. (The USDA’s September report only lowered China’s overall rice crop for 2010/11 by 1.5 million tonnes.) While these losses are not likely to start a parade of crop losses around the world, the USDA did lower 2010/11 world ending stocks by almost 3 million tonnes to 94.56 million.
The situation in India is at the opposite extreme. The USDA projects 2010/11 overall rice production in India at 99.0 million tonnes for 2010/11, up from 89.13 million in 2009/10. India is also dealing with a bumper wheat harvest, and the combination of these two crops has virtually overwhelmed government storage and led many to ask why India is not moving aggressively into the export market for one or both of these crops.
Below is an excerpt from our most recent Special Update. To receive access the full story, along with our daily coverage of 16 markets, visit futures-research.com for your free 2 week trial!
