Record-low stocks bring world rice price to the boil 

Record-low stocks bring world rice price to the boil 
Jeff Wilson and Saijel Kishan

Posted to the web on: 15 August 2006
Bloomberg

THE world may soon pay more than ever for its most abundant food: rice.

A record crop this year in a market anticipating rising production costs will do little to slow the rally for the staple diet of 3-billion people throughout the world.

As China, the top consumer, and Vietnam, one of the food’s biggest exporters, continue to plough up their paddies, rice would double within two years to almost $20 for 100lb (45kg) from the current $9,90, said Stephan Wrobel, CEO of Diapason Commodities Management in Lausanne.

Mother Earth Investments - a Liechtenstein-based fund whose rice holding rose a percentage point to 4% during the past 12 months - has already gained 23% this year, almost triple the Goldman Sachs commodity index.

Fields in China were now being turned into land to build residential buildings, factories and roads, said Roland Jansen, manager at Mother Earth.

The prospect of reduced production threatens to spur inflation in rice-importing countries from the Philippines to Nigeria, while driving up costs for manufacturers such as Anheuser-Busch - the US’s biggest buyer of the grain - and cereal makers such as Kellogg.

Rice inventories worldwide were already near a 26-year low and would drop further, said the US agriculture department.

The quantity of unsold rice this year would be barely half the level of 2000’s surplus, reducing the buffer against a crop failure, the department said.

Fertiliser and irrigation costs are rising with energy prices, and farmers are turning to cheaper-to-grow grains, fruits and vegetables.

“You have more people in the world and yields are not rising as quickly as the population increase,” said Mamadou Ciss, MD at Ascot Commodities in Geneva, which traded about 1,3-million tons of rice last year, almost 5% of the international market.

“World stocks are very tight,” Ciss said.

He said he expects prices to double in three years.

Rice may be the second-best agricultural investment after the ethanol-powered maize market, says Julius Baer Holding, Switzerland’s largest independent money manager.

Rice for November delivery last week gained 4,8% to $9,89 a 100lb on the Chicago Board of Trade, the highest weekly close in more than two years.

Prices have jumped 48% in the past year, outpacing the 19% increase in wheat futures and the 8,3% gain in maize. The record is $12,92 a 100lb, reached in December 1993.

“You could see an inflationary impact from rising prices,” said Robert Subbaraman, senior economist with Lehman Brothers Holdings.

“For exporters, it would be a windfall. For consumers, it would force some governments to give greater subsidies to the poor,” Subbaraman said.

The world’s largest exporters are Thailand, Vietnam and India, and the top importers are the Philippines, Nigeria and Iraq.

The world’s biggest rice consumer is China.

Even forecasts for a record global crop this year are unlikely to dampen price gains. The world’s rice crop would probably increase to 634-million tons this year, the United Nations said.

China had lost 8-million hectares, or 6,6%, of its farmland in the past decade, said a survey released last year by China’s land and resources ministry.

At the end of last year, China had about 122-million hectares of arable land, covering 13% of its territory.

“Prices will rise over the next three years,” said Sunny Verghese, CE of Olam International in Singapore, one of the top three global rice traders.

“If there is a bad drought in any of the producing countries, we could see a fairly sharp spike,” said Verghese.

Manufacturers are feeling the pinch. Kellogg said that cost increases for fuel, energy and commodities in the second quarter were “unprecedented”.

Profit in the quarter rose 2,9% to $266,5m after the largest US cereal maker raised prices for the first time in two years.

Growth in harvests would be curbed by the cost of fuel and shortage of land, said Greg Smith, MD of Global Commodities in Adelaide, Australia.

Smith’s $90m fund, which invests in energy, metals, soft commodities and bonds, has jumped 14% in the past 12 months, double the 7% gain in the Reuters-Jefferies commodity research bureau index.

“Even with genetically modified crops, we still require water, fertiliser and equipment to harvest the crop,” Smith said.

The US, which ranks 11th in world production, would experience a 12% fall in production this year to 197,2-billion pounds from a year ago because of fewer plantings and hot weather, the government said.

“Farmers have cut back fertiliser and mined the soils, which will show up as lower yields,” said a former head buyer at Uncle Ben’s Rice,” Smith said.

“Prices are too cheap to prevent acreage cuts next year,” he said.

Chicago futures would rise to $13 for each 100lb as long as crude-oil prices stayed above $40 a barrel and would surge to $20 per 100lb if crude reached $100, he said.

The crude-oil price dropped to $73,42 in New York yesterday.

Also, a developing El Nino weather pattern threatens to reduce rice harvests.

The latest strong El Nino phenomena - in 1997-98 - led to record global imports by Indonesia, the third-biggest producer and consumer of rice.

The pattern is fuelled by rising Pacific Ocean temperatures coupled with a drop in barometric pressure that shifts warm waters east, moving clouds and moisture to parts of China and North America and reducing rainfall in Asia, central Africa, Australia and parts of central and South America.

“I’m convinced an El Nino is evolving into a threat for rice and other grains, from Indonesia to Brazil,” said Drew Lerner, president of World Weather in Kansas.

“By the time the national weather service declares an El Nino, it will already be influencing weather,” he said.

Conditions have turned wet in the north China plain, pointing to a growing El Nino influence.

Inventories in China had fallen for six years, with stockpiles before this year’s harvest to drop to the lowest since 1975, the US agriculture department forecast last month.

China had not revealed any plans to make large purchases this year or next, the department said.

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