The price of rice has fallen quite substantially from its high. However, the fundamental story for the crop is quite simple; a growing world population means more people to feed, causing a growing strain on supply. That being said, rice is the primary food staple and source of starch for most of the world, with the largest consuming regions being Asia and Africa. Annual consumption in the U.S. alone is approximately 30 pounds per person, per year. Rice is one of the most labour-intensive and expensive crops to produce. As the costs of production inputs increase we can expect for these costs to be reflected in the price rough rice. There have been reports of strong demand from Iran, UAE, Saudi Arabia and the U.S. Fiscal year 2010 exports have been estimated at over 2.1 million tonnes.
Over the past few months, we’ve seen extraordinary weather events around the world. Weather is in an important factor for all agricultural commodities. To produce a high-yielding rice crop, growers require high heat, plentiful water and smooth land that facilitates flooding and drainage. A recent drought in China and South East Asia is estimated to have affected 61.3 million residents and 5 million hectares of crops. Rice has recorded relatively moderate gains of about 10 percent since this began. This pressure on supply is likely to further increase the price.
Rice is also a politically sensitive crop. Unpredictable government intervention adds to volatility in a market that is already thinly traded. The Chinese government is watching food prices and supply on a daily basis. Local price control, industry and commerce authorities have launched campaigns to minimize the amount of food hoarding and price gouging. The maximum fine for these activities is 1 million yuan (about $150,000 CAD/USD). The rice market is structurally prone to fluctuations because only a small amount of production is exported, and this trade is concentrated among a handful of producers. Government intervention has increased volatility and distorted the market with short-term price support that fails to give clear picture about how to invest.
According to The World Agricultural Outlook Board, rough rice prices are estimated to average between $13.90-14.40 per bushel or 8 to 11.5 percent above current levels. Risks to rough rice prices include unexpected weather, softening in import demand and an increase in available supplies of the major exporters.
Technical Outlook
From the chart (Figure 1) we can see the steep decline from the May rice contract’s high of $16.45 per/bushel on December 14, 2009, down to low of $12.45 per/bushel in just three months. Drawing a horizontal support line back to March 2009, we find that what was once support level looks to be a point of resistance for the rice contract at this time (See yellow circle Figure 1). However, a technical indicator should not be used in isolation, so we must watch a few clues at this resistance point in order to help establish our entry and exit points. If the price does penetrate this resistance line we will want to watch for increased volume. This helps demonstrate that enough buyers are committed and that it is not a false breakout.
Figure 1
If we do get a breakout, traders can consider entering the market and use a stop order just beneath the resistance line as protection. Another technical pattern we can see is a classic head-and-shoulders top. This is a bearish technical signal we need to keep in mind. If we measure the height of the head (the middle peak) to the neckline (the green line) this gives technicians an estimate of how far we might expect the price to drop. Often the price will retreat back to the neckline before falling off again. To protect against this, you can use a trailing stop. It will allow you to protect some of your profits if the price were to fall off, and continue to collect profits if the price breaks through the neckline.
If we look at another chart (Figure 2), we can look for signals using the 9- and 18-day moving averages. When the purple line (the 9-day) crosses the green line (the 18-day) from above this is a bearish (sell) signal. When the purple line or crosses the green line from below this is a bullish signal. The red circles show the sell signals and the green circles show buy signals. Looking at the most recent price action we can see that the purple line is starting to turn up towards the green, which might be additional evidence that the market is about to breakout past this resistance level.
Figure 2
Margin Limits
Spec Hedge
Initial $1,080 $800
Secondary $800 $800
Please note margins are subject to change without notice at any time.
About the Rough Rice Futures Contract
U.S. No. 2 or better long grain rough rice with a total milling yield of not less than 65%
Trading Hours
Electronic: 8:00 p.m. – 7:15 a.m. CT
Pit : 9:30 a.m. – 1:15 p.m. CT
Ticker RRK0
Exchange CBOT (Chicago Board of Trade/CME Group)
Contract 200 cwt
Value $1.00 $2000
Min Tick Size 0.005
Min Tick Value $10
Kyle McEwan is a Market Strategist based in Lind-Waldock’s Toronto office, and is serving clients in Canada. If you would like to to learn more about futures trading, you can contact him at 877-840-5333 or via email at kmcewan@lind-waldock.com.
The data and comments provided above are for information purposes only and must not be construed as an indication or guarantee of any kind of what the future performance of the concerned markets will be. While the information in this publication cannot be guaranteed, it was obtained from sources believed to be reliable. Futures and Forex trading involves a substantial risk of loss and is not suitable for all investors. Past performance is not indicative of future results. Please carefully consider your financial condition prior to making any investments. Not to be construed as solicitation.
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