Rice Supply A Boon To Asian Growth

| About: ELEMENTS Rogers (RJA)
This article is now exclusive for PRO subscribers.

Rice is the staple food most of Asia and especially the Pacific Rim. Over 90 percent of the world's rice is produced and consumed in the Asia-Pacific Region and production is forecasted to rise 4.3% to 68.59 million tons in 2012 versus 65.76 million tons in 2011. Global stockpiles were projected by the USDA to rise to 30% higher than their levels in 2007-08 which prompted curbs on exports by countries including India; driving the Asian benchmark to a record $1,038 a ton earlier in the year. That said, however, record production from Vietnam and Indonesia and country specific reasons are expected to weigh heavily on rice prices for the next year. This is good news for consumers struggling with exported inflation from the U.S. and European debt crisis.

India, a leading exporter of rice before a slew of domestic curbs created shortages, returned with a bang to the global markets in 2011-12, toppling traditional leaders like Vietnam and Thailand to emerge as the biggest exporter, after lifting a three-year ban on non-basmati sales overseas. India is expected to ship 6 million tons of rice this year, according to the USDA. That's enough to supply Nigeria, the largest importer, for about 2 1/2 years. Stocks in Indian government warehouses stood at 29.8 million tonnes by at the start of 2012 and reports of them beginning to rot surfaced prompting action. This was well above the target of 11.8 million tonnes the Indian government had set before attempting to forestall a collapse in prices. Indian farmers rely on a favorable monsoon season for production. Rain from this year's monsoon looks to be right in line with the 50-year average, the India Meteorological Department said in April, so we can expect a solid crop again this year from India.

For the U.S., the fifth-largest shipper of rice in the world, production is forecasted to slump to the lowest level in 14 years as farmers are moving towards more profitable crops including soybeans and corn, the USDA estimates. But, the summer heat wave and drought is causing havoc in those pits. Soybeans have risen structurally since the beginning of the year, rising steadily by more than 33% so far and a currently spiking. Corn prices have responded to the weather news in the U.S. as well, pushing towards $8 per bushel. U.S. Exports for rice will decline for a third year in a row; dropping 7.9 percent to 2.8 million tons, the lowest since 2000-2001. In the face of potentially awful corn and soybean harvests in the U.S. there may be some substitution effects. The iPath Dow Jones UBS Agricultural ETN (NYSEARCA:JJA) has rallied sharply in the past three months due to its heavy exposure (+40% total) to corn and soybean prices. At the very least palm oil prices will continue to rally along with soybeans. The iShares MCSI Malaysia Index ETF (NYSEARCA:EWM) is heavily invested in palm oil producers.

The Philippines, which has been the world's largest importer or rice in the past, has been pushing towards food self-sufficiency. The government anticipates importing just 500,000 tons this year, down substantially from a record 2.47 million tons in 2010. Supply is also expected to increase from Myanmar, which is now opening up its economy after decades of isolation, it may ship 750,000 tons, from 600,000 tons a year earlier.

The increase in supply from around the region from other countries like India, Pakistan and Myanmar has farmers and the government in Vietnam worried as rice prices continue to drop along with demand, even though they have been building new export markets for upscale, fragrant rice to markets like Hong Kong and China. The export price in 2012 is VND 2000 (around $0.10 USD) per kilo lower than the last year's price. Also India is trying to poach Vietnam's main export market, Africa, as transport costs are significantly in their favor.

Thailand, sells rice at a premium in the world market. Last year, the export price of Thai rice ranged between $525 and $575 per tonne. But this year due Thai government's high support price to farmers whose crop last year was wiped out due to the flooding the price rose to $660 tonne. The government paid farmers 15,000 baht ($476 USD) a tonne for 100% white paddy and 20,000 baht ($634 USD) for fragrant paddy to fulfill its election promise. This raised the export price of Thai rice thus making it non-competitive in global markets, much to the delight of Vietnam earlier in the year, especially as India hadn't yet lifted their quotas. This has changed and India has since taken advantage of this situation.

For investors, the food markets are a mixed bag right now and to invest in commodities means betting that the central banks will inflate to stimulate demand in the higher stages of production. That process looks to be starting with the measures taken recently by China, Vietnam the E.C.B. and to a lesser extent Japan. The U.S. will not be far behind.

So, while the rice market looks well supplied for the medium term this will keep a lid on lower and middle class inflation in Asia and Africa where the greatest economic growth is expected. The Rogers International Commodity Index ETN (NYSEARCA:RJA) is one way to gain exposure to what looks like a near bottom in commodity prices as well. While the developed world which relies on corn and soybeans at all levels of their food supply chain will be hit with the dual problem of low harvests and hot money flows similar to what we saw in the 1st quarter of 2012. This will not be good for U.S. and European GDP growth through the next 12 months.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.