Rice Is on the Verge of a Breakout
Justin Rohrlich July 23,
2010 1:35 PM|
history serves, this could be only the fifth opportunity
in 60 years to take advantage of conditions like these.
Quick -- name the second-largest rice-growing state
in the US.
If you said California, you're absolutely correct.
(Arkansas is number one.) But how many people know California
even grows rice? Or that the state’s rice crop is in
bad shape due to this spring’s weather? (The weather
conditions will likely lead to lower yields, tightening
supply, and significantly raising prices.)
In a report released this morning, money manager Shawn
Hackett, founder and president of Hackett Financial
Advisors, a firm with a specific focus on agricultural
The rice market seems to be on the verge of breaking
out from a classic bottoming base pattern. Any weekly
close over $10.20/hwt would create a major technical
breakout that should finally begin the process of recalibrating
rice prices to a more appropriate higher level.
In an interview with Minyanville, Hackett explained
the fundamental side of California’s rice situation:
California’s rice crop can suffer badly if they have
a very cool, wet spring. This creates a situation where
you have delayed planting and much slower development.
Every time we’ve seen these weather patterns in the
past, it’s led to a 20%-30% yield reduction. The USDA,
which is expecting a record crop, is in denial. It simply
can’t happen if California is down 20%-30%. Obviously,
that’s a contentious point; many people think I’m nuts.
But what hurts California rice crops is precisely all
the conditions we’ve seen this year; going back to 1950,
we’ve seen four seasons with identical weather patterns.
Why would it be any different this time?
Hackett also pointed out the weather conditions in Asia
that are affecting their rice crops:
[There have been] devastating flooding rains in China
that have averaged 150% to 200% above normal during
the current rice-growing season with up to 16 inches
of rain falling in June alone. The irreversible damage
that has already been done to the rice crop will likely
reduce China’s rice production by about 3% from expectations.
To put this into perspective, China was expected to
produce a total rice crop of 137.5 million tons. A 3%
reduction in expected crop production would shave 4
million tons of rice supply. China was expected to export
1 million tons of rice in 2010/2011. With a 4 million
ton reduction in Chinese rice supplies, China would
now become a net importer of 3 million tons. This would
represent half of the Vietnam’s total expected exports
for 2010/2011, and Vietnam is the second-largest exporter
in the world.
This China rice story is another very bullish supply-side
development that, when added to the reduced rice crop
supplies in Vietnam and Thailand due to drought this
year and the reduced rice crop supplies in California
due to a cool wet spring in 2010, will require a dramatic
decline in global ending rice stocks in the months just
ahead. The total lost global rice production from China,
Thailand, Vietnam, and United States (California) from
current expectations would be around 15 million tons.
Hackett’s bullishness on rice also stems from what
he calls the “rice-to-wheat price ratio”.
With current prices near $10/hwt and well below the
cost of production, to say there is the potential for
huge upside in rice prices is an understatement. Another
powerful relationship has started to flash major buy
signals as well. It is the rice-to-wheat price ratio.
Remember, these two food commodities are the most important
in the world as they are essential for feeding over
half of the world’s population and preventing global
famine. When the price of one gets too high relative
to the other, a major substitution effect takes place.
This rice-to-wheat price dance between these two agricultural
commodities has tended to range between 1.5:1 and 3.5:1.
At 1.5:1 rice is cheap relative to wheat thereby making
rice the better buy. When the ratio is closer to 3.5:1,
rice is expensive relative to wheat and wheat would
then be the better buy.
He said, “Rice is not a particularly closely followed
market. My job is to find these price misrepresentations
so people can take advantage of a misfiring like the
one we’re seeing now. It takes a while for the market
to respond to severe weather issues in Asia. In that
sense, you can get in early and take advantage of the
discounted prices before the market recognizes it and
becomes common knowledge. Wheat is a classic recent
example. The former Soviet states have been suffering
through a drought for months, but in the last 30 days,
it suddenly jumped more than 40% when people finally
noticed it and said, ‘Oh my god!’ But where were they
when it was really time to be bullish? Right now, there
is a tremendous opportunity to take advantage of inefficiencies
in the rice market, akin to what we just saw with wheat.”
Further bolstering the case for rice, Hackett notes
that, “the commercial operators are near record long
while the speculators are near record short against
a price level that is well below the cost of production.
Rice remains my number-one commodity investment idea
at this moment in time based upon the overall risk versus
For those who aren't commodities investors, there are
a handful of stocks that could benefit from these developments.
Hackett mentions “the usual suspects” which include
John Deere (DE), Potash (POT), and Mosaic (MOS), and
also sees potential in two companies that are lesser-known
names to the average investor but have “dominant market
positions” in the ag space:
Titan International (TWI), a “leading global supplier
of complete wheel and tire assemblies for off-highway
vehicles” and Trimble Navigation (TRMB), which manufactures
GPS systems used for everything from precision self-steering
mechanisms for farm equipment to flow and application
control systems like the WeedSeeker, which “senses the
presence of living plants, allowing targeted herbicide
application and savings of up to 90% in herbicide costs.”
So now, when someone asks you for a favor and you say,
“I wouldn’t do it for all the rice in China,” you’ll
be talking about 4 million tons less than usual.