Rice Commodity Market - Credit and Finance Risk Analysis

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Rice Commodity Market

CME Group Rough Rice Futures Price

USDA Rice Outlook Reports

USDA Rice Yearbook Dataset

On April 24, 2008, rice futures on the Chicago Board of Trade reached a record high price of $25.07 per 100 pounds.

In 2008 the international market for rice was effected by:

Rice is a thinly traded commodity (approximately only 8% of total international production is traded in the international marketplace because historically the largest consuming nations in Asia have generally been self-sufficient in rice production matching consumer demand).

Weather (drought in Australia, floods in Asia, poor weather in highland areas of Viet Nam) that resulted in poor harvests.

Increase of the brown plant hopper in the Philippines effecting crop yield and its recent increase in China.

Increased consumption in Asia due to strong economic growth.

Various nations and populations have tastes and preferences for specific varieties and types of rice and there is little substitution between varieites with regard to consumer demand.

The decision by several nations to reduce the amount of rice available for export in order to maintain domestic stockpiles and reduce prices for their own citizens (India restricted exports to the more expensive Basmati variety only as it citizens primarily consume cheaper varieties of short-grain rice; In April 2008, Brazil temporarily halted rice exports to ensure domestic supply).

Infrastructure and governmental problems such as poorly designed or lack of irrigation projects, inadequate roads, inadequate property rights law, price controls, subsidies, lack of land reform.

Under funding of research projects at the International Rice Research Institute (IRRI), which has led to a reduced ability to develop rice varieties that are either more productive or disease and pest resistant.

International rice stockpiles have declined from a high of almost 150 million metric tons in the late 1990s to less than 80 million metric tons in 2007.

Long-term issues that will affect rice cultivation and price:

Population levels continue to increase in Asia and Southest Asia where rice is relied upon as a primary food source.

Due to the reliance of millions of lower income, rural and metropolitan residents the price needs to be regulated / subsidized.

Farmers will be requested to increase production but every year there is less available arable land.

Run off from chemical fertilizers and pesticides are polluting neighboring lakes, rivers, and groundwater.

Salinity is incresing in rice paddies located along coastal plains and just slightly inland.

Rice Cultivation

Rice, which has been cultivated for approximately 5,000 years, is generally considered to be a semiaquatic annual grass. These cultivated plants are native to tropical and subtropical southern Asia (Oryza sativa) and southeastern Africa (Oryza glaberrima) although rice is now cultivated all over the world. The rice plant is cultivated in a flooded field known as a paddy, and some varieites are cultivated in drier upland areas (for instance, the Nerica variety). Rice fields are prepared for planting by either water buffalo or hand tractor, and rice plants are planted primarily either by hand or small tractor, or by aircraft as in California (aerial planting / agricultural aviation).

Rice is the second most consumed grain in the world and is an important food staple in East, South and Southeast Asia.

Click on image to view larger photo; Photo source: International Rice Research Inistitute

Rice is not a homogenous commodity. There are actually several thousand varieties and hybrids based on in texture, size and color, and presently there are more than 50 different published international price quotations for rice. In fact, there are distinct sub-markets featured according to a number of criteria, the most important of which are variety, quality (defined mainly by the percentage of broken kernels) and the degree of processing.

In Asia, there is a growing problem with the brown plant hopper that has adapted to rice plant strains that were specifically bred to resist the insect. However, inadequate funding to the International Rice Research Inistitute has resulted in insufficient research to counter the infestation, which can damage as much as 20% of the harvest in any given year.

There are several characteristics that are used to classify rice (some of the characteristics are related to the variety of rice and some are related to preparation for market):
: Size; Long-grain / Indica rice is long and slender.; Medium-grain / Japonica rice is shorter and plumper than long grain.; Short-grain rice is almost round in appearance.
: Color; Brown rice retains the bran that surrounds the kernel (hull has been removed).; White rice lacks the bran and germ.
: Aromatic are Thai jasmine and Indian basmati rice.
: Glutinous; Indicates the stickiness of the rice (rice is actually gluten-free; stickness is dependent upon the level of amylose content in the grain).; Glutinous rice is primarily grown in Southeast Asia.
: Rough; Indicates that the rice has not been milled and both the hull and the bran layer remain attached to the kernel.
: Milled; Indicates that both the hull and bran layer have been removed. If only the hull is removed then result is brown rice, which is a wide-selling product.; The second stage of milling which removes the bran layer results in what is known as milled white rice.
: Parboiled; Indicates that the rice was soaked and then steamed under pressure prior to milling, which is done to reduce the amount of grains broken during the milling process.; Parboiled rice typically sells at a premium to non-parboiled rice.
: Brokens; It is also important that the rice grains remain intact: the fewer the amount of broken grains the higher the market price for the rice shipment.; Brokens are primarily used in in the production of pet foods and to make rice flour.

Rice Conversions: 1 cwt = 100 pounds = 2.22 bushels = .0453 metric ton; 1 metric ton = 2,204.6 pounds = 22.046 cwt = 48.992 bushels; 1 cwt rough rice = .032 metric ton milled; 1 metric ton milled = 31 cwt rough

Producing Nations

On January 12, 2012, the USDA World Agricultural Supply and Demand Estimates (WASDE) indicated: The U.S. 2011/12 rice crop is estimated at 185.0 million cwt, down 3.1 million from the previous estimate due primarily to lower yields. Average yield is estimated at 7,067 pounds per acre, down 100 pounds per acre from last month, but an increase of 342 pounds per acre from 2010/11. Harvested area is estimated at 2.618 million acres, down 6,000 acres from the previous estimate. Long-grain rice production is estimated at 116.4 million cwt, down 1.1 million from last month, and combined medium- and short-grain production is lowered nearly 2.0 million to 68.6 million. Rice imports for 2011/12 are unchanged from last month.

The National Agricultural Statistics Service’s (NASS) Rice Stocks reported total rough rice stocks at 146.9 million cwt as of December 1 and total milled stocks at 6.2 million (9.1 million cwt on a rough-equivalent basis). Total rice stocks on a rough-equivalent basis are 155.9 million, down 15 percent from a year earlier. Long-grain stocks as of December 1 are estimated at 96.9 million (rough-equivalent basis) and combined medium- and short-grain stocks at 56.2 million.

Rice 2011/12 domestic and residual use is lowered 3.0 million cwt to 124.0 million cwt—all in the long-grain class. Long-grain domestic and residual use is projected at 89.0 million cwt, and combined medium- and short-grain at 35.0 million. The decrease in domestic and residual use is implied from the higher-than-expected December 1 stocks estimate. All rice exports are lowered 1.0 million cwt to 90.0 million—all in the long-grain class. The pace of exports and sales of long-grain rice is lagging based on U.S. Bureau of Census data through October and U.S. Export Sales data through December. Long-grain exports to the Western Hemisphere have been lagging due to competition from South America, principally Brazil. Additionally, long-grain exports to the Middle East have been lagging due to strong competition from other suppliers. Conversely, the pace of sales of combined medium- and short-grain rice is supportive of the current export forecast. The 2011/12 rough rice export projection is lowered 1.0 million cwt to 33.0 million, while exports of combined milled and brown rice are unchanged at 57.0 million cwt (rough-equivalent basis). All rice ending stocks for 2011/12 are projected at 38.5 million cwt, up 0.9 million from last month, but down 10.0 million from 2010/11. Long-grain rice ending stocks are forecast at 20.6 million cwt, up 2.9 million from last month, but a decrease of 15.1 million from the previous year. Combined medium- and short-grain rice ending stocks are projected at 15.2 million cwt, 2.0 million below last month, but an increase of 5.1 million from 2010/11.

The 2011/12 long-grain, season-average farm price range is projected at $13.50 to $14.50 per cwt, unchanged from last month, while the combined medium- and short-grain farm price range is projected at $15.00 to $16.00 per cwt, down 50 cents per cwt on each end. The all rice season-average farm price is forecast at $13.80 to $14.80 per cwt, down 20 cents per cwt on both ends of the range.

Global 2011/12 rice production, consumption, and ending stocks are raised slightly, and trade is lowered from a month ago. The increase in global rice production of 0.6 million tons to a record 461.4 million tons is due primarily to larger forecast crops for Bangladesh and Cambodia, which are partially offset by reductions for Brazil, Pakistan, North Korea, and the United States. Larger forecast Aus and Aman seasonal rice crops in Bangladesh led to the forecast record crop at 34.0 million tons, up 1.0 million from a month ago. Global domestic disappearance (includes post-harvest losses) is raised mostly due to increases for Cambodia and Thailand. Global trade is lowered as import forecasts are reduced for Bangladesh, the Philippines, and Russia. Export 2011/12 forecasts are lowered for Brazil, Thailand, and the United States and raised for Cambodia. Global 2011/12 ending stocks are forecast at 100.1 million tons, up 0.6 million from last month, an increase of 2.9 million from 2010/11, and the largest stocks since 2002/03. Global ending stocks are up primarily due to increases for Bangladesh, Thailand, and the United States, which are partially offset by reductions for the Philippines and Brazil.
Source: USDA World Agricultural Supply and Demand Estimates (WASDE) - No. 502 / January 12, 2012 (.pdf format)

Australia

Austrailian production over the past few years has been severely affected by drought conditions. Prior to the development of drought conditions, Australia had contributed approximately 20% to 25% of the world medium-grain japonica rice trade and exported approximately 80% of its entire rice crop as domestic demand is low. Australian rice producers harvested approximately 19,000 tons in the 2008 season compared to a high of approximately 1.64 million tons in 2001. Planting season commences in October (southern hemisphere Spring) and there are now new concerns regarding locust infestation that may affect the 2011 crop.

Bangladesh

Boro rice

BRRI-28 rice

Lata rice (coarse)

Minicate rice

Nazirshail rice

Parija rice

Sarna rice

Brazil

Rice is cultivated in every state of Brazil but the major production is in Mato Grosso, Tocantins, Rio Grande do Sul (irrigated rice) and Santa Catarina (irrigated rice). Within the Latin America and the Caribbean region, Brazil is the largest producer of rice. The nation primarily produces locally bred Indica varieties of the IR8-type.

BRS Talento (upland rice)

China

China is the largest rice producer in the world and rice is also the primary staple food of the nation. Irrigated rice is the primary method of rice production within the nation but upland rice is cultivated in the provinces that have mountainous regions, such as in Yunnan, Guizhou, Guanzi, and Jiangxi.

Hsien (Indica rice)

Keng (Japonica rice)

India

Indian basmati rice is a long-grain, non-glutinous rice cultivated in the states of Punjab and Haryana, and in the Dehradun district of the state of Uttarakhand. India previously exported quantities of basmati rice (primarily to Indian communities in the United Kingdom and the United States) as it was more expensive that other varieties of rice sold domestically within India. However, as wages have increased with the growth of a larger middle class in India, larger amounts of Basmati rice is now being consumed within India. In addition, the export pattern has also changed: more Basmati rice is now exported to the Middle East and Iran. The price for Basmati rice has been increasing annually since 2006 due to increased domestic and international demand.

Iran

Iran has a substantial domestic cultivation of rice but local production has not kept up with domestic demand thus the nation has also become a substantial importer of rice, especially the Basmati variety from India.

Italy

Arborio Rice is the variety that is used extensively in traditional Italian risotto recipes.

Japan

Rice is Japan's most important agricultural crop and is fundamentally intertwined in the culture of the nation.

Akita Komachi rice

Koshi Hikari rice

Pakistan

Pakistan is the fifth largest rice exporter in the world, and also cultivates aqnd exports a Basmati rice variety.

Philippines

The Phillippines cultivates a substantial amount of rice however it is insufficient to meet demand and the country is one of the largest rice importers in the world. In March of 2008, the country had to request supplies from the East Asia Emergency Rice Reserve, an emergency regional rice stockpile sourced from Southeast Asian countries as well as China, Japan and South Korea.

Palay rice (unhusked rice) is extensively grown and the yield is measured in cavan per small farm holding. The Bureau of Agricultural Statistics (BAS) measures yield in terms of metric tons per hectare. The BAS indicates that yield has been improving in the Philippines, increasing from 12.95 metric tons per hectare in 2001 to 16.24 metric tons per hectare in 2007 with the widespread application of improved seeds, fertilizer, pesticide, and herbicide. However, a problem related to fertilizer distribution in 2008 resulted in the country suffering a loss in rice self-sufficiency and a large importation program was necessary to bring sufficient supply to Philippine citizens as indicated above.

Sri Lanka

Traditional, non-commercial rice varieites include Suwandel, Kaluheenati, Maavee, Poloyal and Hondaravalu.

Thailand

Thailand the world's largest rice exporter. Thailand's 100% B grade white rice is the world's main physical benchmark for global trade.

Hom Mali rice

Jasmine white rice is one of the most sought after varieties due to its softness and aroma for use in steamed rice.

United States

The USDA indicates that "rice is typically ranked eighth among U.S. field crops based on both value of production and planted area." The United States is a substantial net exporter of rice on an annual basis. U.S. rice exports include rough or unmilled rice, parboiled rice, brown rice, and fully milled rice.

Again, the USDA indicates that approximately 99% of the entire U.S. rice crop is produced in four regions:
1. Arkansas Grand Prairie (Arkansas is the largest single rice producing state, approximately 45% of rice producing acreage)
2. Mississippi Delta (includes parts of Arkansas, Mississippi, Missouri, and Louisiana)
3. Gulf Coast (Texas and Southwest Louisiana)
4. Sacramento Valley of California.

The areas in the United States, combined, produce approximately 100 varieties of rice. California and Louisiana are the second and third largest reice producing areas in the United States, respectively. Florida also cultivates rice. The rice industry in South Carolina declined over 100 years ago however it was once known for the Carolina Gold and Carolina White varieties.

Arkansas, Mississippi and Louisiana rice farmers primarily produce long-grain varieties, which accounts for just over 70% of U.S. production.

California rice farmers produce primarily medium- and short-grain rice varieties. One of the best known medium-grain varieties is Calrose rice. California Mochi Rice is a glutinous variety.

Approximately 50% of the annual U.S. rice harvest / production is marketed locally within the United States. The bulk of industrial use of rice in the United States in the beer brewing industry.

In August 2006, there was a problem that developed in the United States when the US Department of Agriculture (USDA) publicly indicated that the commercial rice crop of Arkansas and Missouri had become contaminated with unapproved genetically engineered Bayer CropScience US rice known as Liberty Link Rice 601 or LL 601, which had been engineered with a herbicide-resistance trait. The nation of Japan banned all U.S. long grain rice imports and the European Union (EU) publicly indicated that all US long grain rice will have to be tested by an accredited laboratory using a validated testing method and accompanied by a certificate before entering any of the member countries of the EU.

Vietnam

Vietnam is the world's second largest rice exporter after Thailand. Just a little over 50% of rice cultivation is located in the Mekong River Delta (in the very southwestern tip of the nation) and approximately 18% of rice cultivation is located in the Red River Delta (in the northeast coast of the nation). The country was able to substantially increase national, annual production by reversing collectivization programs and privitizing farmer's land holdings, adapting an open trade policy, and investing in irrigation and transportation projects. However, productivity per agricultural worker is low in Vietnam compared to other Asian nations but this may be resolved by consolidation of small family-owned plots.

Varieties produced in Vietnam include Indica (long grain), Nep Mot, Tam Thom and Nang Huong.

Rice Futures Market & Pricing

As indicated above, rice is a thinly traded commodity (approximately only 8% of total international production is traded in the international marketplace because historically the largest consuming nations in Asia have generally been self-sufficient in rice production matching consumer demand).

CME Group / Chicago Board of Trade (CBOT)

In the United States, rough rice futures and options are traded and settled on the CME Group Exchange (on 12 July 2007, the CBOT merged with the CME under the CME Group holding company and ceased to exist as an independent entity). Trading for rice futures on the CME Group / Chicago Board of Trade (CBOT) is in both open auction and electronic trading.

The symbol for the open auction rice futures contract is "RR".

The symbol for the electronic traded rice futures contract is "ZR".

Open auction trading hours for corn futures and options are Monday through Friday, from 9:30am to 1:15pm Central Time (CST / CDT).

CME Globex (Electronic Platform) fours for rice futures are 6:00pm to 7:15am and 9:30am to 1:15pm Central Time CST), Sunday through Friday

Futures Trading Contract Size: 2,000 hundredweights (CWT) (200,000 pounds; approximately 91 Metric Tons)

Deliverable Grades: U.S. No. 2 or better long grain rough rice with a total milling yield of not less than 65% including head rice of not less than 48%. Premiums and discounts are provided for each percent of head rice over or below 55%, and for each percent of broken rice over or below 15%. No heat-damaged kernels are permitted in a 500-gram sample and no stained kernels are permitted in a 500-gram sample. A maximum of 75 lightly discolored kernels are permitted in a 500-gram sample.

Position limits: see CBOT Rice Futures Rules & regulations Chapter 17 www.cmegroup.com/rulebook/CBOT/II/17/17.pdf

Tick Size: minimum 1/2 cent ($.005) / hundredweight ($10.00/contract)

Price Quote: Cents/hundredweight (¢ per CWT)

Contract Months: September, November, January, March, May and July

Last Trading Day: The business day prior to the 15th calendar day of the contract month

Last Delivery Day: Seventh business day following the last trading day of the delivery month

Margins: are often revised and must be verified with CME / CBOT
www.cmegroup.com/wrappedpages/clearing/pbrates/performancebond.html?h=2&reporttype=marginvol

Commodity Credit Corporation (CCC) / Farm Service Agency (FSA)

In the United States, the Commodity Credit Corporation (CCC) provides financing to farmers. U.S. Government payments consist of Direct Payments (DP), countercyclical Payments (CCP) (DP and CCP are payments that are decoupled from current production and are paid on historic base acres and payment yield), Loan Deficiency Payments (LDP), Marketing Loan Gains (MLG). The 2008 Farm Bill generally extends the existing 2002 program.

To receive loans or loan deficiency payments (LDP) for a crop, a producer must execute a note and security agreement or loan deficiency payment application on or before May 31 of the year following the year in which such crop is normally harvested. To receive direct payments, an individual or entity must be a producer on a farm with base acres enrolled in the Direct and Counter-cyclical payment Program (DCP). Producers may elect to receive a 22% advance payment when they enroll in the DCP. Base acres are established on a farm for covered commodities based on historical plantings. For instance, for each covered commodity, the direct payment in 2008 equaled 85% of the farm's base acreage for the crop, times the direct payment yield for that crop, times the direct payment rate for that crop. The 2008 rate for long grain rice was $2.35 per hundredweight, and medium/short grain rice was $2.35 per hundredweight. The USDA's Farm Service Agency distributes direct payments for the CCC.

For each commodity, the total direct payment for the 2009 crop year for producers on a farm is determined by multiplying 83.3% of the farm's base acreage times the farm's direct payment yield times the direct payment rate. For 2012, the payment percentage changes from 83.3 to 85% of the farm's base acreage.

The following is an example for 2009 rice:

Base acres planted to rice:

100 acres x 83.3%

83.3 acres payment acres

x 10 hundredweight direct payment yield

x $2.35 per hundredweight direct payment rate

$1,957.55 direct payment

Direct payments are not based on producers' current production choices, but instead are tied to established base acres and yields.

In addition to direct payments, the 2008 Farm Bill authorizes counter-cyclical payments, which provide support counter to the cycle of market prices as part of a "safety net" in the event of low crop prices. Counter-cyclical payments for a commodity are only issued if the effective price for a commodity is below the target price for the commodity. Target prices, as provided by the 2008 Farm Bill, for rice is $10.50/cwt.

Marketing assistance loans provide producers interim financing at harvest time to meet cash flow needs without having to sell their commodities when market prices are typically at harvest-time lows. Loans for covered commodities are non-recourse because the commodity is pledged as loan collateral and producers have the option of delivering the pledged collateral to the CCC in satisfaction of the repayment of the outstanding loan at maturity. A settlement value is determined and applied to the outstanding loan principal and interest.

Rice Cultivation and Commodity Market Information Sources

Africa Rice Center (WARDA) www.warda.cgiar.org/

Arkansas Rice Growers Association www.arkansasricegrowers.com/

Asia Rice Foundation www.asiarice.org/

Bangladesh Rice Foundation (BRF) www.ricefoundation-bd.org/

California Rice Commission www.calrice.org/

California Rice Exchange www.calricex.com/

FAO (United Nations Food & Agricultural Organization) Rice Price Update www.fao.org/es/ESC/en/15/70/highlight_533.html

Guyana Rice Development Board grdb.gy/

International Rice Research Institute (IRRI) www.irri.org/

Thai Rice Exportes Association www.riceexporters.or.th/

The Rice Association www.riceassociation.org.uk/

U.S. Rice Producers Association www.usriceproducers.com/

USA Rice Federation www.usarice.com/

USDA Economic Research Service (ERS) Rice Outlook usda.mannlib.cornell.edu/MannUsda/viewDocumentInfo.do?documentID=1285

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