U.S., not Asian, long grain rice fundamentals are more statistically bullish than any other grain on the face of the globe. If we did not have the 2010 rice crop disaster, it would be even more bullish. In 2010, the rice crop nearly disintegrated due to the worst heat in perhaps 100 years.
Even if we have a record yields in 2012, which I am now allowing for, the 2012-13 marketing year is still bullish. Could we say that about the corn market in 2012? I think not. Record corn yields would most likely crush corn price even with strong wheat prices and crop losses in South America. In corn, the U.S. crop drives the world market, not so for U.S. rice.
Chicago rice futures are not an Asian rice contract. It is an Americas rice paddy or rough rice contract. It is not directly linked to the 721 million metric tons of world production. It is linked to the 35 million metric tons of production in the Americas.
I hate to let down all the super shorts in rice futures, but Indian rice has nothing directly to do with U.S. rice futures. Production of rice in the Americas is collapsing, and a shortage is likely to develop in the next few months. The South American milled rice export offer is the highest milled rice offer in the world and for good fundamental reasons.
U.S. rice unfortunately has a cash market made in South America and a futures market made by the hedge funds and in the trading rooms of New York, Singapore and Bangkok and New Delhi. That is a pity, but also a reality. That is why the basis difference between cash and futures can swing so widely.
Farmers are offended when the difference between cash and futures is wide. They think it should be forced to be narrow. Remember cash and futures rice are related but different animals. As long as they correlate, futures are useful as a hedging tool. Too many farmer-sellers of rice would rather sell their rice at $13 per hundredweight with a $14 per hundredweight futures than $15 cash and $18.50 futures. To me that makes no sense whatsoever.
Chicago rice futures trade a very thin slice of the world rice market. U.S. exports a specialty rice product called rough rice, which is less than 5 percent of all rice traded in the world market. The rice world trade is less than 7 percent of all rice produced and consumed in the world. That means that the futures market is priced off about 0.35 percent of all the rice produced and consumed each year in the world. Yet the media freely suggests that the rice price on the CME Group Exchange is “The World Price of Rice,” which is utter nonsense.
I get calls all the time from people who want to know what the rice price is going to do next. I would ask “what price?” If it is cash, I will tell them my opinion of where the price in Brazil is headed, and whether folks south of the Rio Grande River are short bought or long (recently they were short bought). If it is CME Group rice futures, I will give them my idea of what is in the mind of Asian speculators keying off the latest self-serving announcement by some rice official in Asia.
So am I advocating shutting down U.S. rice futures? No, not at all. Just because the basis is wide or narrow does not totally remove the usefulness of U.S. rice futures. Does the cash and futures price correlate well? That is the key question and the answer is yes, otherwise no one would trade the thing.
If you think the milled rice quotes out of India or Thailand are the final word on the rice price, ask yourself this question. Would you trade wheat based on what wheat flour is trading for in the world market? I certainly would not. Wheat flour is to the wheat market what milled rice is to the rice market, a derivative product of the stuff farmers grow.
Do you know why not many people track world rough or paddy rice prices? It is because it takes a lot of blood, sweat and tears to do so. I have been doing so since 1981, and I would never take any action until I knew what the rough rice markets were doing across the globe.
Managing rice price risk is not easy. I have read a lot of opinions on the rice market and hear a lot of talks on the rice market, but I do not agree most of the time with what they say.
Rice is a great mystery of rice policies that contradict each other. Today rough rice is trading at $9 per hundredweight in India and $18.50 in China. If I were trying to buy rice I would harp on nothing but that Indian price. If I were a seller, I would harp on nothing but the Chinese price. Since I favor neither buyer nor seller of rice, I harp on both every day. India is not going to sell a lot more rice to the U.S. because the rice it sells is much more expensive than U.S. long grain. It is aromatic rice called Basmati.
What I do suspect is that by the end of 2012, China will be buying rice from the U.S. for the first time in modern history. And just when U.S. long grain stocks could be vapor thin. So the high Chinese price has more to do with the U.S. price than the low Indian price. China has already bought long grain rice from Uruguay.
For the first time in modern history, China is buying rice from the Western Hemisphere. Why doesn’t China buy cheap rice from India? It wants safe, traceable rice from an origin it trusts. China recently rejected meal from India for objectionable contents. And big Thai exporters were caught selling rice blended with local Chinese rice, which now lowers the Chinese trust of rice from Thailand. Get the picture? They are very savvy, wealthy and demanding buyers.
In India, the government has subsidized the price of rice to a low level that would bankrupt most rice growers in Asia. I have asked why India gushes out rice so cheaply and has let its rice become a rice food stamp program for Africa, while letting its own citizens go malnourished. I have no real answer.
I could fly to India and ask the politicians why they let rice be so cheap in India. The only rational answer is that it buys them votes. That cheap rice policy works until the rivers run dry and in Asia, rivers are starting to run dry. The two major rivers in China do not flow into the Pacific during the dry season. I live in Texas and that is happening on the Rio Grande and now on the Colorado that flows out of Austin, Texas where I now reside.
What happens in Texas does not stay in Texas. What is happening now in Texas is beginning to happen in Saudi Arabia and Egypt and soon enough Asia. I am fortunate to live in Texas and know rice farmers here. The Colorado River area of Texas is in its worst drought in perhaps 500-1,000 years. Texas can afford to be anti-rice farming and pro-recreational water use because it has supermarkets. But Asia cannot.
So my forecast is as follows. Stocks of long grain rough rice will be very tight in 2012-2013 even with record yields. That makes U.S. long grain one of the most statistically bullish row crop grown in the South in 2012.
If Brazil prices remain high in the next six months, which I think they will, so will U.S. prices. In the Western Hemisphere long grain rice stocks will be tight. U.S. rice should trade at a premium to Brazil rice, which recently traded between $14 and $15.50 per hundredweight, depending on the region. The Brazil price is all that matters right now for cash rice in Arkansas.
In conclusion, think Brazil, where the nuts come from. And by the way, pecan prices are way up because, you guessed it, China now buys about 25 percent of the U.S. pecan production. Pecan rice for dinner, anyone?