Barrons: Rice Prices Getting Set to Pop

By SIMON CONSTABLE

Bad news: That cheap bowl of rice you were counting on to stretch your paycheck may soon get pricey. Good news: You'll be able to profit off the coming move, although you'll need to be nimble.

It's happening because Western Hemisphere farmers are cultivating less rice while inventories are set to plummet. "Stocks are running low now, and rice prices do not go down when acreage goes down," writes Milo Hamilton, in a recent edition of his newsletter, The Firstgrain Rice Market Strategist. "Never [has that happened] in any year that we have traded rice, which is for over 30 years."

In short, prices are going higher.

U.S. land dedicated to rice planting will hit the lowest level since 1987, about 2.6 million acres, according to the U.S. Department of Agriculture. That's down 30% from 3.6 million acres in 2010.

That's not the only reason Firstgrain's Hamilton sees higher prices. Production is projected to see double-digit percentage declines in the major Western Hemisphere producers—Brazil, Argentina, Uruguay, Peru, and Ecuador—according to recent USDA projections. In addition, Hamilton says, for 2012-2013 (next season), U.S. stockpiles relative to the amount of rice consumed will be about half the normal level of about 15%. So, there's not much cushion.

Why is this all happening? It reflects the risk/reward of farming rice versus other crops, explains Andy Aaronson, chairman of the rice interagency committee at the USDA. The price of urea—a nitrogen-based plant food used to grow rice—has jumped, pulled higher by corn plantings. Farmers chasing historically higher corn prices are willing to pay more for nitrogen-based fertilizer. Urea was selling for more than $700 a ton in April, compared with less than $500 a year before.

FARMERS ARE SWITCHING land from rice production to other crops, notably soybeans, he says. Soybeans aren't fed with nitrogen-based plant foods Also, soybean futures hit nearly a four-year high on the Chicago Board of Trade last Monday.

So, low inventories, lower output, and no commensurate change in consumption, all point to higher prices.

How do you profit from this? By trading CME Rough Rice futures. The May rough rice contract fell three cents on the week to settle at $14.95½ per hundredweight on the Chicago Board of Trade.

But here's the rub. Although these futures are based on physical rice traded in the Americas, the market can be influenced by Asia.

The Asian and Western Hemisphere rice markets are largely separate—with Asia trading milled rice, and the Americas preferring umilled, or rough rice, according to the USDA's Aaronson. Still, Asia holds some sway. Because more rice is grown and consumed there, vastly more news and data about the region's rice crop and supply are available, compared with the dearth of news about what's going on in the Americas.

If you dare to trade CME rice futures, expect them to bounce around a lot due to the influence of Asian speculators reacting to Asian info. While the Western Hemisphere's dynamics could eventually dominate the U.S. market, rice traders can expect a bumpy ride—and be prepared to jump in and out while playing the peaks and valleys.

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