Dipping into the Rice Price Rise

For such a little grain, rice certainly makes a big impact. One out of every five calories consumed by humans comes from the grain, and it's the second-most consumed cereal on the planet.

Like most agricultural commodities, rice prices have soared to record highs lately. But rice doesn't get as much attention in the U.S. as wheat or corn (maybe because you can't make a pizza or fuel a car with it). Still, traders who stick to the grain like, well, white on rice, could stand to make substantial gains in their portfolios.

Rice 101

Humans began cultivating rice as far back as 8,000 years ago, and it's now a daily staple for over half the world's 6.6 billion people. The hardy grain can grow almost anywhere: on mountaintops, in swamps and in either temperate or tropical latitudes. But it's especially suited for regions like Southeast Asia and the Gulf of Mexico, because rice requires heavy levels of rainfall to grow and plenty of low-cost labor to harvest.

According to the USDA, last year, farmers worldwide produced more than 420 million metric tons of rice. Most of that crop stayed in its country of origin: China and India grow the most rice in the world, but their citizens also eat the most, too. That leaves about 7% or so of the total production to be traded in the international market.

Thailand and Vietnam are the world's two largest rice exporters (sharing 26% and 15% of the market, respectively.) The U.S. comes in third, with a rice crop worth an estimated $1.8 billion.

In fact, rice is a vital part of the Southeastern economy. Five of the country's six major rice-growing states are in the South: Arkansas, Texas, Louisiana, Mississippi and Missouri (California being the sixth). Together, these states produced 6.3 million tons of rice in the 2007/8 season. That's a measly amount compared with China or Thailand, but since Americans only eat about 30 lbs of rice a year - less than a Chinese citizen eats in one month - about half the American crop can be exported. So while the U.S. accounts for just 2% of the world's total rice production, it shares 12% of the global rice trade.

Despite the huge 2007/8 rice crop, global stockpiles of the grain have dwindled to their lowest point since 1976, as consumers continue to eat more rice than farmers can grow. World stores of rice have shrunk from 130 million tons eight years ago to today's stockpile of 72 million tons - only enough to meet 17% of annual global demand. That has put governments - especially in Southeast Asia - in a pickle, since supply shortages of their citizen's staple food could mean breakouts of civil unrest and violence.

Rice on the Market

Traders on the Chicago Board of Trade exchange futures contracts in "rough rice," or rice as it comes in from the field after harvest, where it has been separated into individual grains. Contracts run in September, November, January, March, May and July, at a standard size of 2,000 cwt.

Since 2002, prices for rough rice have skyrocketed, rising 75% alone in the last year. One year ago, rough rice traded at $10 on CBOT. As of April 2, however, prices for the May 2008 contracts had nearly doubled, closing at $19.79.

"I don't think we'll see [rice] prices fall precipitously any time soon," Ted James, the principal economist at the Asian Development Bank in Manila, told the IPS News Agency

Source: http://www.futures.tradingcharts.com/

Prices have spiked for several reasons. Weather has certainly played a part: Floods in the Philippines and Vietnam have pummeled local harvests, and a 45-day cold snap spanning from China to Hanoi has hurt crops as well. But rising oil prices also factor in, driving up fertilizer prices and the cost of rice harvest and transport.

At home, the U.S. government's subsidized biofuel programs, designed to ease global warming and reliance on foreign oil, have caused a shortage in the amount of farmland dedicated for any crop that isn't corn, including rice.

Experts think rough rice stands to rise even further, although the Wall Street Journal argues that high prices have less to do with rice shortages, and more to do with speculators playing the commodities market. Whatever the reason, the depleted government stockpiles have created an atmosphere where any disruption in the supply stream causes rapid, volatile price swings.

As prices increase, export nations have been curtailing their shipments. Vietnam, Egypt, Cambodia and Guyana have all issued export bans, and the U.S. has also cut back on exports, due to growing domestic demand for the grain. Even Thailand has reduced its shipments, from last year's 9.55 million tons to this year's estimated 8.75 million tons.

In fact, the high prices have encouraged farmers to forgo the domestic markets in favor of export channels, which has some Asian governments worried about domestic supplies. Aware that they can fetch better profits through international markets, rather than the artificially low rates mandated by their governments, farmers in Vietnam have been hoarding their crops, waiting for the price to hit $1,000/ton.

This has led poorer nations, which tend to import a larger fraction of their rice, closer and closer to political turmoil. Haiti, for instance, lingers on the brink of food riots - which Burkina Faso has already experienced. Protests in the Philippines have inspired one high-ranking government official to ask fast food restaurants to serve only ½ cup of rice with meals, instead of the usual 1 cup.

It's even more interesting in China. As the People's Republic becomes richer, it needs more food to feed its population, but citizens have increasingly moved away from farming and into more profitable sectors. Land once designated for rice paddies has been reclaimed for commercial expansion. Last year, China began moving away from being a net exporter of rice to becoming a net importer, and raised export taxes and removed import tariffs to increase the amount of rice in its marketplace.

"We are in a new bullish trend because nobody believes that China can catch up in matching their domestic production to demand," Mamadou Ciss, managing director at Ascot Commodities NV in Geneva, told Bloomberg. "Prices can still go higher."

For that reason, it's worth keeping an eye on China, since its insatiable hunger for all commodities hard and soft has increasingly driven the market recently.

Still, despite the obvious upward trend in rough rice, the commodity's price is subject to so many factors that it's not for the faint of heart - or the new to investing. But those who take a careful approach in their trading will find that in the coming months, the price of rice will be quite nice.