Global rice market: will it follow corn and wheat?
Global crop prices have been on a bull run since the beginning of June 2012 in response to severe drought in the United States causing widespread fear of another food crisis, the third in the last five years. Corn futures prices in the Chicago Mercantile Exchange (CME) have gone up by more than 50 percent in the last two and half months whereas soybeans and wheat prices have increased by 30-45 percent during the same period.
According to the most recent (August 2012) USDA estimates, U.S. coarse grain production is expected to be nearly 38 million metric tons lower than 2011/12 level. Amazingly, this is a 58 million ton swing from its July estimates when 2012/13 production was estimated to be 20 million tons higher than 2011/12 level. Apart from corn, soybean production has also been drastically lowered this month by nearly 12 percent from its July estimate. Unlike soybeans and coarse grain, the majority of the U.S. wheat has been spared by drought because of early harvest. However, wheat production in many other parts of the world, particularly in Russia, Ukraine, and Uzbekistan has been affected by drought, causing global production to fall by 30 million tons relative to 2011/12 level.
Although global wheat stocks are at a comfortable level, 50% higher than what they were in 2007, lower production and the likely rise in feed use because of higher corn prices are likely to put additional pressure on wheat. The question becomes: how will this impact rice consumption and prices. The answer is “minimal”. In my opinion, rises in wheat prices for a few months are unlikely to make people shift to rice, however, if wheat prices remain high for a longer period then it is likely to cause substitution away from wheat to rice.
In the next few months, global rice prices will be primarily influenced by weather and policy in rice growing countries. As I indicated in my previous blog, the Indian monsoon has been revived in the last few weeks with above average rainfall in many parts of India. Some states have witnessed flash floods in recent days because of heavy rainfall. As the drought fear subsides, farmers in eastern and central India now face the wrath of floods. I just hope that farmers in the region have planted submergence tolerant varieties, disseminated by the International Rice Research Institute in close collaboration with the Ministry of Agriculture and the Indian Council of Agriculture Research (ICAR) that can withstand flood water for up to two weeks. At least for the time being, I will stick to my earlier production estimate of 95 million tons of rice for India in 2012/13. This figure may even go higher if monsoon remains active in the subcontinent for the remainder of the season.
With the improving crop situation in India and more than 40 million tons of government stocks of rice in India and Thailand, things are looking up for rice. However, there are still uncertainties ahead with extreme weather such as floods, drought and typhoons in parts of Asia that can damage the current crop but rice market fundamentals look strong enough to dodge isolated instances of extreme weather in the Asian rice bowl.