Rice Climbing in Widest Discount to Wheat Since 2008
Rice Climbing
Tomohiro Ohsumi/Bloomberg
Rice is cultivated in a field.
Rice is cultivated in a field. Photographer: Tomohiro Ohsumi/Bloomberg
Aug. 24 (Bloomberg) -- Edward Morse, head of commodities research at Credit Suisse Group AG, talks about the outlook for agricultural and industrial commodities. Morse also discusses his investment strategy. He speaks from New York with Bloomberg's Susan Li. (Source: Bloomberg)
Aug. 23 (Bloomberg) -- Matthew Keegan, a portfolio manager at Arlon Group, talks with Bloomberg's Melissa Long about the impact of Russia's ban on foreign sales of wheat on food prices. Russia, the world's third-largest grower last year, banned exports amid the worst drought in at least half a century. (Source: Bloomberg)
Rice, this year’s worst-performing grain, is set to rally as consumers and investors seek alternatives to wheat after heat waves, wildfires and floods ruined crops across the Northern Hemisphere.
The staple food for half the world tumbled 22 percent this year in Chicago trading while wheat as much as doubled since June. The last time the discount was this wide was in February 2008, two months before rice reached a record in a global food crisis that sparked riots from Haiti to Egypt. Drought in Thailand and flooding in Pakistan, representing a combined 43 percent of global exports, are also threatening supply.
“We’re very bullish and see the chance of a significant return,” said Jonathan Barratt, Sydney-based managing director at Commodity Broking Services Pty, which manages risk for agricultural growers and users. He is using warrants to bet on prices he says may climb 29 percent to $15 per 100 pounds by December, from $11.625 now. Wheat climbed 54 percent and corn 20 percent since Barratt said June 25 that grains were cheap.
The jump in prices may drive up rice as consumers lock in supplies, said Barratt. Drought and excessive rain have caused the destruction of as much as 21 percent of the combined wheat crops of Russia, Kazakhstan, Ukraine and Canada, according to Bloomberg calculations based on U.S. Department of Agriculture data. World rice use may climb 4 percent in 2010-2011, the USDA estimates, as an economic recovery boosts purchasing power.
‘Second-Round Effects’
While food prices tracked by the United Nations climbed to a five-month high in July, they’re still 22 percent below the mid-2008 peak. Unlike then, global growth is predicted to accelerate to 4.6 percent this year, the fastest pace since 2007, according to the International Monetary Fund.
Rice futures in Chicago plunged to $9.55 per 100 pounds on June 30, their lowest level in almost four years and less than half the record $25.07 in April 2008. Wheat advanced to $8.68 a bushel in Chicago on Aug. 6, from $4.255 on June 9.
Measured in metric tons, rice traded at a discount of $53 to wheat on Aug. 5, the widest level since Feb. 27, 2008, and compared with a premium of $242 in April of that year. The discount is already narrowing and was about $10 today as rice rallied 4 percent in Chicago. Over the past 10 years, rice has cost an average $41 a ton more than wheat, according to data compiled by Bloomberg.
Stockpile Buffer
“A significant part of diets in emerging markets are not largely located around the wheat market per se, it’s also around those other markets, rice and so forth,” Wayne Gordon, an agricultural commodities analyst at Rabobank Groep NV in Sydney, said in a Bloomberg Television interview. “This hike in the wheat price may then lead to second-round effects following into those other markets such as rice.”
The rally in grains may increase some costs for food companies. Option traders are the most bearish in three years on shares of Kraft Foods Inc., as the Northfield, Illinois-based foodmaker faces higher commodities costs. ConAgra Foods Inc., the maker of Slim Jim snacks, has forecast cost inflation of 4 percent for this fiscal year, with the biggest increases being spending on energy and proteins.
Unlike 2008, crop destruction won’t cause a global food crisis because record harvests have replenished stockpiles, the UN’s Food and Agriculture Organization said Aug. 4. World wheat inventories will be the second-biggest since 2002 while those for rice will be the highest since 2003, the USDA estimated Aug. 12.
Export Curbs
Part of this year’s slump in rice can be explained by the supply outlook. Global production will increase 3.7 percent to an all-time high of 459.2 million tons in 2010-2011, according to the USDA, which combines local marketing years for its estimates. Stockpiles at that end of the period will be 2.7 percent higher at 97.5 million tons, the USDA forecasts.
In Thailand, the biggest exporter, inventories will end the 2009-2010 season at 6.29 million tons, the highest level since 1961, and expand 18 percent to 7.44 million the following year, USDA data show. The U.S., the fourth-largest shipper, is forecast to boost production to a record 7.68 million tons in 2010-11, according to the USDA.
The world is “much better buffered” against shortages than it was at the time of the food crisis, Macquarie Group Ltd. analysts Kona Haque and Alex Bos said in a report dated Aug. 17. “Prices are unlikely to spiral upwards to the same extent.”
That may not be enough to stop countries curbing shipments. Russia, the third-largest wheat grower, banned exports on Aug. 15 after drought and wildfires destroyed 38 percent of its grain crop, according to government estimates. Ukraine, the biggest barley exporter, said two days later that it plans to limit sales to protect domestic supply as the government said dry weather had ruined at least 11 percent of production.
‘Eroding Income’
Vietnam, the second-largest rice exporter, limited exports during the crisis in 2008, as did India and Egypt. Two years later, India still has curbs on overseas sales.
“Any movement in basic food commodities such as wheat and rice very easily starts eroding incomes” in poorer countries, spurring governments to protect supply, said Prakriti Sofat, a regional economist at Barclays Capital in Singapore.
The rally in wheat since June may spur buyers such as Bangladesh to import more rice, said Concepcion Calpe, an economist at the UN’s Rome-based FAO. The country may import 600,000 tons of rice in 2010-2011, up from 90,000 tons the previous year, while wheat imports may drop to 3 million tons from 3.3 million tons, said the USDA’s Foreign Agricultural Service that has specialists in more than 90 countries.
Price Survey
The Thai export price for milled rice, Asia’s benchmark, may climb as much as 15 percent to $550 a ton by October, said Mamadou Ciss, a rice broker since 1984 and chief executive officer of Hermes Investments Pte Ltd. in Singapore. Ciss, who in 2006 correctly predicted a doubling of prices, said gains could be curbed by sales from Thai government stockpiles.
Prices will increase 9.6 percent to $525 a ton in two months, the highest level since March, according to the median estimate in a Bloomberg News survey of 10 exporters and traders Aug. 10 to Aug. 20. The price of 100 percent grade-B white rice added 3.7 percent to $479 a ton on Aug. 18, according to the exporters association. The price often tracks the rate in Chicago, declining 21 percent since Jan. 6 this year.
Rice exports from Pakistan, the third-largest shipper, may plunge 22 percent below average this year after floods destroyed crops, according to exporters. Shipments may drop to 3.5 million tons after as much as 20 percent of production was damaged, Malik Jahangir, chairman of the Rice Exporters Association of Pakistan, said in a telephone interview from Lahore Aug. 20.
Production in China, grower of almost a third of the world’s crop, may drop by 5 percent to 7 percent, in an initial assessment, after the worst floods in more than a decade, according to Li Qiang, managing director of Shanghai JC Intelligence Co., a researcher specialized in agriculture on Aug. 2. Planting of late-season rice was delayed by about 10 days because of colder-than-usual weather, Ministry of Agriculture spokesman Chen Mengshan said on the government’s website. Rain slowed the development of mid-season rice, Chen said.
The Philippines, the world’s biggest buyer, may increase purchases after agreeing to buy a record 2.47 million tons for delivery this year as drought cut domestic output, Agriculture Secretary Proceso Alcala said Aug. 16.
Supply and demand are “very tight by historical standards,” said Diapason Commodities Management SA in Lausanne, Switzerland, which has about $7.5 billion under management, including farm commodities. With demand expanding, consumers should expect “much higher prices in the next two years.”
To contact the reporters on this story: Supunnabul Suwannakij in Bangkok at ssuwannakij@bloomberg.net; Luzi Ann Javier in Singapore at ljavier@bloomberg.net.
To contact the editor responsible for this story: James Poole at jpoole4@bloomberg.net.
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