Dr. Michael Deliberto
Jun 09, 2020
By Michael Deliberto, PhD
With rice futures approaching record high levels, the USA Rice Daily asked Dr. Michael Deliberto, an assistant professor in the Department of Agricultural Economics and Agribusiness at the Louisiana State University Agricultural Center in Baton Rouge, to provide some context. The views expressed are the author’s and not necessarily those of USA Rice.
BATON ROUGE, LA -- During the COVID-19 pandemic, international rice prices peaked amid domestic supply concerns and the institution of export restrictions by many foreign suppliers. As countries implemented measures aimed at mitigating the effects of the coronavirus, delays and disruptions in their supply chains were occurring. Although it is difficult to predict when the global rice market will fully return to pre-COVID pricing levels and market efficiency, global rice prices are becoming more competitive which, in turn, is having a calming effect on rice prices.
In the U.S. rice market, futures prices remain elevated compared to pre-COVID pricing levels driven, in part, by limited old crop rice supplies. The 2019 marketing year dynamics can be characterized by a manageable carry-in that coincided with sales to Iraq, steady Latin American export shipments, and a large volume of rough rice that was sold early in the 2019/20 marketing year. These factors combined are believed to have been the leading drivers in the rise in old crop rice prices.
However, understanding the present rice futures market situation requires a deeper dive into the fundamental and technical drivers of the market.
One attractive feature of trading futures is that profits can be realized from both declining prices (by selling) and/or rising prices (by buying). When external forces related to COVID-19 began to negatively affect the corn, soybean, and cotton markets, fund managers (speculators) looked to invest in rice futures. Rice futures have performed exceptionally well since the onset of the COVID-19 pandemic. Whether or not this strong performance in the futures market is the result of investors seeking a new commodity safe haven, staple goods such as rice and wheat have fared relatively well.
It is important to note that rice futures are “thinly traded” as compared to the grain and oilseed markets. Outside influence from speculators can lead to a thinly traded market suddenly exhibiting distortions in contract volume which is interpreted as implied volatility within the market. As rice futures attracted interest from funds, the magnitude of their interest is reflected in the daily volume of contracts.
July rice futures are approaching their highest level since 2008, when futures traded near $25.00/cwt. Some of the underlying factors to the rice market (and among traders, for that matter) include supply tightness and increasing concerns over global food security as the coronavirus continues to affect countries and their economies. With the slow-down in U.S. exports, it is hard to make the argument that prices are being supported solely on foreign demand. USDA export sales reports have been “light” in recent weeks.
Fundamentally, the forces of supply and demand demonstrate that limited supply leads to higher prices. This can be observed in the current marketing environment. Tightness in old crop supplies are reflected in July 2020 rice futures contract prices which are hovering above $22.00/cwt. Futures prices at these levels are very difficult to sell into the cash market. Millers cannot equate these futures prices to a cash price paid on the grounds that they either: a) do not need additional stocks to cover immediate needs; or, b) will choose to secure supplies at a later date when prices decrease.
New crop prices for the September 2020 contract are firm at the mid $12.00 level. This inversion between old and new crop futures prices reflects short-term available supply versus a longer-term supply outlook. Given that acreage and production is expected to increase in 2020, the latter is a logical argument as to why the price inversion exists between the July and September rice futures contracts and why the September contract reflects a $12.00/cwt price.
It is a reasonable expectation that July futures will fall prior to the delivery date for the contract. Outside speculators have entered the rice market and established a short position for the July contract. This means that these outside investors are expecting the futures price to decline and would sell futures contracts in the hope of being able to buy back later identical and offsetting contracts at a lower price.
As rice futures continue to reach new highs in July, September futures absorbed some of the momentum and broke out of their sideways trading range on the recent rally. It is true that market dynamics of the September contract are different. It is possible that when the rally in July is over the market is likely to fall and that will likely be bearish for September contacts. This time of year, adverse weather can sometimes be a key driver behind rallies in futures contracts. Under this scenario, producers can take this as an opportunity to hedge anticipated new crop production if this fits into their marketing strategy. Conversely, timely rainfall coupled with expanded new crop acreage can cause a negative reaction in futures as the growing season progresses. This scenario seems to be materializing for the new crop rice (e.g., September contract), possibly signaling that there is ample supply for 2020. However, a tropical storm in the Gulf of Mexico may change that.
The futures price and the cash price received for a commodity are not the same. While it would be fantastic for a producer to capture a $22.00/cwt July futures price for their crop when it is harvested in August, new crop marketing dynamics do not demonstrate that domestic rice supplies will be that tight nor will export demand be drastically increased due to a major shortfall of one of our export competitors. Simply put, $22.00/cwt rice does not accurately reflect actual market conditions for the current marketing year.
For the producer, rice prices are based on grade, milling quality, and transportation costs. Current season average farm prices are projected by the USDA at $11.80/cwt for long grain rice for the 2020 crop. In Louisiana, new crop bids are $12.00/cwt. In the Mid-South, bids are $13.00/cwt C.I.F. (cost, insurance, and freight) to New Orleans. Cash bids such as these can be considered somewhat strong given the supply and demand outlook for the 2020 marketing year.