When the Tokyo Grain Exchange, the operator of Japan’s largest agricultural bourse, bet its future on rice trading, it didn’t expect radiation fallout would be part of investor decisions and volatility.
The exchange will list rice contracts today for the first time since the start of World War II to boost flagging volumes and profit. The resumption comes amid concern that fallout from the stricken Fukushima Dai-Ichi power plant may spread to crops after it was found cattle had been fed cesium-tainted rice straw.
“The nuclear disaster adds to factors that could influence prices,” said Takaki Shigemoto, a commodity analyst at research company JSC Corp. in Tokyo. “Rice futures may attract speculative money.”
Trading may be volatile as investors weigh the impact of a possible suspension of shipments from growing areas and lower consumption due to health fears, Shigemoto said. The bourse aims to boost overall volume on the exchange to 40,000 lots a day on average by March from 9,626 lots a day in June after listing the new contract, President Yoshiaki Watanabe said last month.
Commercial stockpiles of rice, a Japanese staple, may drop to the lowest level in four years in 2012, after the March earthquake and nuclear disaster curbed production, possibly spurring the government to release its reserves, according to the agriculture ministry.
Faced with criticism from consumer groups and opposition party politicians that lax government control has endangered food safety, the ministry has tightened rice screening before the harvest begins in eastern Japan.
The government ordered Fukushima and 13 nearby prefectures to test rice samples before the harvest. Authorities will ban shipments from areas where they find grains containing cesium exceeding 500 becquerels a kilogram. Rice production in Fukushima and neighboring Ibaraki, Miyagi and Iwate prefectures amounted to 1.56 million metric tons last year, out of the country’s total of 8.5 million tons.
“If the government bans rice shipments on discovery of tainted supplies, that will reduce supply and may boost rice futures,” Shigemoto said.
Average prices of new-crop rice have fallen 12 percent to 12,707 yen per 60-kilogram bag in the 10 months ended June 30, compared with 14,470 yen in the year ended Aug. 31, 2010, the agriculture ministry said in a report July 27. Rice traded in Chicago has jumped 46 percent in the past 12 months and is the best performing grain this year as acreage in the U.S. slumps.
Japan is self-sufficient in the grain as the government protects growers from foreign competition with a tariff of 341 yen ($4.35) a kilogram on imports.
Resumption of rice futures comes after an income-support program for growers was introduced last year, replacing a price control system that ensured farm incomes. The change increased volatility, raising the need to introduce a hedging tool for producers and distributors.
The Tokyo Grain Exchange said the contract may help it break even after three consecutive years of losses. Trading volume plunged 25 percent in the year ended March 31 on reduced participation by local investors.
The decline has been symptomatic of the industry in Japan, where the number of raw-material bourses has dropped to three from seven in 2005, when the government tightened regulations covering sales of riskier financial assets to individuals, leading to a slump in retail futures trading.
A lack of participation from hedgers led to delisting of commodity futures in Japan including broiler chicken, potato and soybean meal. The Tokyo exchange will delist robusta coffee futures and non-genetically modified soybean futures next year on shrinking volumes.
Kansai Commodities Exchange, based in the city of Osaka, will also start trading domestic rice futures today. Trading was suspended in 1939 when the government put grain production and distribution under its control to secure supplies during the war.
The two exchanges will list yen-denominated contracts, with deliverable grades including “koshihikari,” a popular rice brand grown in Japan. Imported rice is excluded from physical delivery at the exchanges as the government maintains control over foreign purchasing and sales.
The Tokyo exchange selected non-glutinous brown rice produced in the eastern prefectures of Chiba, Ibaraki and Tochigi as the standard grade for the contracts. Deliverable brands include rice grown in 12 other prefectures including Fukushima, Miyagi and Iwate, where cattle were contaminated with radioactive rice hay. Beef from those animals was sold at supermarkets nationwide.
“We believe the testing program will be effective in preventing tainted rice from entering the market,” Tatsuya Kajishima, senior press counselor for the Ministry of Agriculture, Forestry and Fisheries, said in an interview.
Still, even if radiation is not found to have spread to rice crops, sufficient inventories and shrinking consumption may damp prices.
Demand for domestic food-rice is forecast at 8.05 million tons in the year to June 30, 2012, compared with 8.19 million tons in the previous year. Food-rice output will drop to 7.93 million tons this year, below a production plan of 7.95 million tons, the government has said. Last year, the harvest was 8.48 million tons.
The government plans to hold 880,000 tons of domestic food-rice in its reserve at the end of June next year, unchanged from a year earlier.
“The Japanese rice market has been oversupplied for many years on shrinking consumption,” said Tetsuhide Mikamo, director at trading company Marubeni Corp.’s research institute. “Domestic rice prices have been under downward pressure because of oversupply. This trend is unlikely to change even if radiation taints crops in some areas.”
The government approved rice futures trading on a trial basis for two years and may decide to halt trading if the market is inactive or unused by hedgers. The Tokyo Grain Exchange trades corn, soybeans, coffee, raw sugar and so-called azuki beans.