Rice Feeling a Little Rough? Not for Long
By Kyle McEwan • Category: Broker Commentary, Educational,

The price of rice has fallen quite substantially from its high. However, the fundamental story for the crop is quite simple; a growing world population means more people to feed, causing a growing strain on supply. That being said, rice is the primary food staple and source of starch for most of the world, with the largest consuming regions being Asia and Africa. Annual consumption in the U.S. alone is approximately 30 pounds per person, per year. Rice is one of the most labour-intensive and expensive crops to produce. As the costs of production inputs increase we can expect for these costs to be reflected in the price rough rice. There have been reports of strong demand from Iran, UAE, Saudi Arabia and the U.S. Fiscal year 2010 exports have been estimated at over 2.1 million tonnes.

Over the past few months, we’ve seen extraordinary weather events around the world. Weather is in an important factor for all agricultural commodities. To produce a high-yielding rice crop, growers require high heat, plentiful water and smooth land that facilitates flooding and drainage. A recent drought in China and South East Asia is estimated to have affected 61.3 million residents and 5 million hectares of crops. Rice has recorded relatively moderate gains of about 10 percent since this began. This pressure on supply is likely to further increase the price.

Rice is also a politically sensitive crop. Unpredictable government intervention adds to volatility in a market that is already thinly traded. The Chinese government is watching food prices and supply on a daily basis. Local price control, industry and commerce authorities have launched campaigns to minimize the amount of food hoarding and price gouging. The maximum fine for these activities is 1 million yuan (about $150,000 CAD/USD). The rice market is structurally prone to fluctuations because only a small amount of production is exported, and this trade is concentrated among a handful of producers. Government intervention has increased volatility and distorted the market with short-term price support that fails to give clear picture about how to invest.