By SIMON CONSTABLE
In May I warned Barron's readers in this column that rice prices were set to surge. And they did, rising 9% on the Chicago Mercantile Exchange, to more than $16.30 per hundredweight in early August from just shy of $15 three months earlier. Prices have retreated since, to around $15 recently. But that doesn't mean the rally is done.
Analysts say the market is poised for a price surge that could take rice even higher, with futures prices exceeding $20.
Why are price gains likely to accelerate? The cash market—where rice is bought and sold physically rather than through futures contracts—already is close to the $20 price point in Brazil. Rough rice was selling for as much as $19 there earlier this month, according to Milo Hamilton, who publishes the Firstgrain Rice Market Strategist newsletter. Brazilian cash prices are at a huge premium to futures prices compared to historic norms, he says.
Brazil is the No. 1 rice producer in the Western Hemisphere, which is largely segregated from the world market for the grain. In the Americas, the trade is in rough, or unprocessed, rice. In Asia, the other key rice region, the focus is on milled rice.
Two factors are squeezing Brazilian supplies and pushing the cash market higher. As in the U.S., rice farmers are switching to other, more profitable crops such as soybeans. Also, there is a drought in Brazil, leading to fewer acres planted and, most likely, lower production—around 7% less than the previous crop cycle, according to Brazil's Agroconsult.
Some see that forecast as optimistic. Firstgrain's Hamilton projects Brazilian production falling 15%. The Agriculture Department estimates Brazil produced 7.9 million metric tonnes in the latest growing season, 2011-12.
But, as with all markets, futures prices and cash prices eventually will converge. "The cash market always wins in the end, and the cash market almost always leads the future[s] market either up or down," says the Hackett Money Flow Report. "Currently, we are seeing an historic mispricing of U.S. rice-futures prices."
SPECULATORS ARE BEARISH on rice prices, which could be a bullish sign. Speculators "have never been this short in history," writes Shawn Hackett, president of Hackett Financial Advisors and the author of the Hackett Report. His data analysis goes back to 1999. Short sellers hope to profit when the price of a commodity drops.
This unusual bearish activity stems from two factors: a misconception that rice trades in a global market, and fears that Thailand's massive stockpile of rice will depress prices. Eventually, the reality that the two markets are largely unrelated will set in, analysts say. At that point, investors will have to buy quickly to cover their massive short positions, provoking an explosive rally.
An "epic short-covering rally" will launch a "very bullish one-sided trade," Hackett adds. Short-covering happens when prices rise and short sellers buy futures to cover potentially losing positions.
As a result, the price of rice is going to snap, crackle, and pop. Hackett says rice futures then could easily exceed $20. Front-month (November) CME rough rice futures closed Friday up 1.5% for the week at $15.475 per hundredweight.
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