Email:    
Password:  

Hackett Advisors in the News

Rice to lead next commodity bull move

Shawn Hackett
Published 11/30/2012


Commodity markets are heading into a reflationary period that should lead to bull markets across the agricultural sector, but no market is as poised for an upward breakout as rough rice appears to be. The fundamentals keep getting more bullish by the day. A money flow buy signal remains in place suggesting an imminent surge in speculative buying activity, and the technical back drop for spot rice prices are approaching a boiling point that should peak by mid-December.

Rarely does one have such clarity in markets like rice. The speculative shorts have provided a rare opportunity to buy rice at an incredible discount to fair value. They know not what they do, and that is a blessing for contrarian value commodity investors. The bullish case for rice is made in detail in the charts below, and the detailed comments at the end of this report should bring the whole bullish outlook together.

Should U.S. exports continue at this torrid pace, which is almost certain if current low prices prevail and rice production remains depressed in South America, cumulative exports would rise 25% to 30% above last year’s levels. There is not enough rice available in the U.S. to satiate this kind of demand. Given the U.S. rice supplies available, an export growth target from last year can only achieve about 5% to 8% growth, and even that would take U.S. supplies to bare minimum pipeline levels. The only way to slow down exports is to ration export demand with substantially higher prices.

When looking at South American rice production potential, the news for the next crop cycle is not looking good. Acreage losses to corn and soybeans have been greater than originally anticipated and erratic weather and lack of water in southern Brazil are likely to crimp yield potential. The bottom line is that Brazil is likely looking at rice production at or below this past year, which already is insufficient to meet burgeoning demand.

It is too late for South America and Brazil to avoid another year of insufficient rice supplies. It is not too late for the next rice crop cycle in the United States. The only way the Western Hemisphere rice supply crisis can avoid getting worse is to encourage a dramatic increase in U.S. rice acres for the next crop cycle. In order to do that, rice prices need to gain dramatically vs. corn and soybeans prices between now and February 2013. As illustrated in the charts above, that process already has begun, but it has a long way to go to reach fruition.

Should weather problems surface in South America for corn and soybeans, as they typically do during this timeframe, and the prices for corn and soybeans rally from here, the job of getting an increase in U.S. rice acres will be even more difficult, if not impossible. This is a very explosive situation.

Rice is in a classical demand-driven bull market with insufficient supplies. Such a combination leads to super price spikes in short periods of time. As we already have seen with the parabolic move in Brazilian rice prices earlier in the year, U.S. rice futures have quite a price parabola of their own waiting just ahead.

The majority of all major U.S. futures rice price spikes have occurred from the fall to the following spring. The seasonal stage has been set for another bull move. Speculators remaining near record shorts leading into this Western Hemisphere rice supply crisis only add additional fuel to the fire. Speculators thinking that apparently adequate Asian rice supplies will save them may be in for a rude and painful awakening.

They evidently have not done their homework on U.S. rice futures. If they had done so, they would understand that outside of the 2008 Asia export ban induced bull market in rice, all other rice bull market price spikes have occurred as a result of bullish Western Hemisphere fundamentals. They have fleeced the rice market long enough and now it is time for them to get fleeced.

A major money flow buy signal was triggered in August 2012 and remains in effect. The two technical price charts contained earlier in this report illustrate the powerful upside technical explosiveness of this market. Both the bullish wedge formation and the bullish diamond formation complete by the middle of December 2012. That is only a few weeks away. Any breakout of these technical patterns will send the funds into a buying frenzy and will cause complacent end users to panic buy as they have played a game of chicken with U.S. rice producers for too long.

Rice prices, relative to the other grain markets, bottomed on Sept. 1 and have been moving up ever since. Over the last two weeks relative rice prices to other grains have broken out and are now in a raging bull market. Rising relative prices always lead a rise in nominal prices.

When you look at the relative U.S. futures prices to Brazilian cash prices, you also can see that both the ratio chart and the differential chart have broken out to the upside after an extended period of basing. Increases in relative U.S. rice futures prices to Brazilian cash prices always precede a large move in nominal prices.

The massive level of current U.S. rice exports has occurred without any buying from China or Brazil. Should either or both of these countries start to buy large quantities of U.S. rice over the next six months, which is likely, then Katie better forget about baring the door…it ain’t gonna make any difference.

As for the relentless drum beat of bearish news out of Asia, the situation is anything but bearish. China is buying rice like it has rarely done before. India over shipped its high-quality rice supplies in 2012 and will now be in lock down mode trying to figure out what to do next. Clearly its blistering exports in 2012 will not be repeated in 2013, and that is bullish, especially with its drought-impaired smaller rice crop.

Both Indonesia and the Philippines are seeing alarming drawdowns of strategic rice supplies that will reach dangerously low levels in 2013 without a massive increase in rice imports. Expect both countries to start buying in a major way over the next few months. With China already the number one rice importer in the world, the apparent large Thailand rice ending stocks will be claimed quickly. Expect global trade in rice to hit a record in 2013.

The U.S. Department of Agriculture is projecting a decline in global rice trade in 2013. They are in La La Land in my view. With China, Indonesia and the Philippines all looking at meaningful increases in imports from 2012 levels, the record high global trade figure set in 2012 should be exceeded in 2013. It would not surprise me to see the number be as high as 40 million metric tons. All this is to say, things are hardly as bearish for rice in the Asian trading block as many analysts would have you believe.

The ultimate end to the long-term bull market in commodities may be on the horizon but being long commodities now should prove to be very fruitful. Looking at the whole agricultural commodity space, the rice market represents the number one buying opportunity.

For those that already own rice, look to add to positions on any technical breakout in the weeks ahead. If you have been waiting to buy rice, look to buy aggressively on any technical breakout. End users should buy as much of their future needs as possible. Time is running out to buy economical rice for your business. Our bull call in rice may be early, following our historical pattern, but with moves like these, it is better to be early then to miss it entirely.

All personal information provided to Hackett Financial Advisors, Inc. will remain private and confidential and not be sold to anyone without your express written permission. There is substantial risk of loss in trading futures and options on futures.
Risk/Disclosure Statement | Refund Policy
© Copyright Hackett Financial Advisors, Inc.