Wednesday, May 20, 2009

The Debts of the Spenders: CBOT Rice Futures Disappoint In Face of Larger Grains Rally

I received a private email from a reader who asked why I did not cover rice but seemed intent on writing about only soybeans, corn, and wheat. Ok. I will be honest. The rice action has been uninteresting from a volume and trading perspective. The rice environment has been bearish all spring on the backs of a last year's commodity slide.

Unlike corn or wheat, rice has yet to recover. And there is no alternate corn-soybeans planting dynamic. In fact, rice has several planting cycles - as many as 3 or 4 harvests a year in fact (depending on the strain).

Another factor is rice's enormous political weight among the emerging markets or as I call them here, the Debts of the Lenders (particularly the socio-economic weight given in Asia to this staple crop). Price controls, import restrictions, and other political gimmicks were hastily enacted last summer on the backs of rhetoric about hyper-inflation. Farmers reacted predictably and planted a lot. Moreover, several Asian nations decided they didn't face such severe shortages and started to sell their hoards on the market to raise money in last fall's deflationary spiral. Well, you can guess what happens when several big players decide to sell at the same time.

But at least one analyst is taking a contrarian perspective.

CBOT Rice Stumbles In Presence Of Large World Supplies

A year after prices soared to unheard of levels amid panic over supply shortages, rice appears to be plentiful and the market is in the midst of a prolonged slump.

The stalled global economy, large Asian crops and governments’ loosening their grip on their stocks have all conspired to keep prices under pressure for months, analysts said.

Chicago Board of Trade futures closed at $11.94 per hundredweight in the nearby July contract Tuesday, down from $15.63 on the first trading day of the 2009 and down from an intraday high of $13.57 on April 13. On April 24, 2008, the nearby contract hit an all-time high of $24.85.

Although the market has had brief rallies and remained range-bound at times, the trend has been lower since the start of the year. “The markets can collapse, they can rise, but they can also just sort of grind down,” said Milo Hamilton, co-founder of “And that’s what we’ve been seeing.”

Rice’s performance is in stark contrast to other grains markets. It’s also a drastic departure from last year when fears of shortage sparked food riots internationally and purchase limits for a couple of U.S. retailers.

Looming over the market are large supplies in some Asian countries that, unlike last year, are willing to part with some of it. Thailand is expected to unload some of its government intervention stocks into the market, with the USDA projecting 2009-10 exports of 8.5 million
metric tons after the country was a net importer in 2008-09. India is expected to end its export ban (as well as its ban on rice futures trading). Smaller countries such as Indonesia and Bangladesh are expected to curb imports.

The U.S. Department of Agriculture projected world rice production for 2009-10 at a record 448.1 million tons, up 4.5 million from the current year.

“Large crops are projected for most of Asia, including record crops in Bangladesh, Cambodia, India, Indonesia, the Philippines, and Thailand; and a near record in Burma and Vietnam,” the report stated.

The seeds for the current bear market were sown during last year’s historic bull market, some analysts said.

Mark Creed, president and CEO of Creed Rice Company, said that growers “undoubtedly responded to high prices” and planted more rice. Governments also intervened to encourage growers to plant more rice and pursue higher yields, he said.

He added that would-be buyers have been “constipated” with high-priced stocks purchased last year.

“There’s no question that what happened last year was extremely detrimental to the overall process of the market,” Creed said.

Analysts mostly agree that there was no shortage of rice last year; the problem was that some countries decided to ban exports. Now, Thailand and India are expected to slowly release supplies.

“They’re sitting on it, they’re still not selling it much yet, but eventually they’re going to have to,” said Jack Scoville, vice president of Price Futures Group.

In the face of the large supplies and a market that shows no signs of returning to last year’s highs, buyers have largely retreated to the sidelines, analysts said. “Basically, people are buying hand to mouth,” Hamilton said. “When you have those large supplies in countries, there’s
always an opportunity for the buyer to think he can get a better price some time.”

Analysts disagree as to how bearish current market is, and how long prices will continue to drag. Some say the market needs a surprise buyer, which they add seems unlikely.

Creed said the most obvious way the market could get a jolt is from a natural disaster. He thinks the large supplies could loom over the market through the first half of 2010, although he notes that others don’t think prices will suffer for that long.

The market’s swoon has been supply driven, he said, and a disruption of supply is how it could rebound. He said that as an example, a reduction in the Indian crop from 100 million tons to 80 million tons, perhaps because of an unusual monsoon season, which could change the market’s
outlook in short order.

Jeremy Zwinger, President and CEO of the Rice Trader, said the long-term supply situation is not as bearish as it seems to some right now. Stocks-to-use ratios are still low, he said, and the seemingly ample supplies are a product of very strong crops.

“You don’t have record world crops every year forever,” Zwinger said. “You need to have a record crop every year to be able to keep up with the population increase. If you dropped down to the (production) level of five years ago today, you’d have massive issues.”

He added that the biggest factor in the market’s climb last year and its plunge this year has not been supply and demand, but the dollar. It was weaker last year and has rebounded, but Zwinger and others expect it to plunge again. That will make prices higher, he said.

A wild card for the CBOT market is the U.S. supply situation. Traders and analysts say the only supportive element in the market at the moment is crop concerns in Arkansas, the nation’s top riceproducer, due to heavy May rains and flooding. Analysts say that the industry mostly
believes that the USDA’s estimates for the crop and ending stocks have been overly optimistic.

Source: CME News for Tomorrow
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