USDA Rice Crop Supply and Demand Estimates
USDA has been given a lot of grief lately about various reports and rice hasn’t been left off the list regarding questionable numbers. The difference with rice is twofold; not only is production overstated, but the demand estimates have been artificially lowered due to insufficient supplies. The production side of the equation is generated by NASS and the Interagency Commodity Estimates Committee which consists of four people who put together the WASDE supply and demand numbers. In the case of rice this year, they had to start at the bottom with what is most likely their lowest carryout number (pipeline) and work upwards:
A Few Things to Consider When Trading Rice
- Total acreage for long-grain rice is projected to be 1.74mm acres which are broken down above.
- Total open interest is only 8,972 contracts of which 8,435 is in January, 498 March, 13 May, and 26 July, hence no real spread opportunities in the deferred positions and market orders are ill-advised due to the lack of liquidity. The options market is fairly thin as well. Best to TRADE SMALL.
- A contract is 2,000 hundred weights and trades in ½ cent increments, so a 1 cent move is $20 per contract vs $50 in com, beans, and wheat.
- 20MM HWTs is historic.ally considered pipeline minimums.
- The crop year is Aug 1- July 30
That said, let’s review…
U.S. Rice Production
USDA is using 127mm HWTs for total production. This number, along with Dec 1 stocks, will be revised in the Jan 12th final production report. Based on canvassing and conversations with numerous commercials and producers, I believe that number is too high as Arkansas is overstated by conservatively 6mm HWTs due to overstated field yields and dropping milling yields. Problems throughout the year included a late-planted crop, a wet spring, and high temps and low moisture in September.
U.S. Rice Imports
A fairly static number representing high-priced specialty rice, primarily Basmati and fragrant rice from India. Landed value in the US is approx. $1,200/MT vs US rice valued at roughly $550/MT FOB. Other Asian origins (Thailand, Vietnam, etc.) would pencil into the US at approx. $400/MT, but the quality is not and has never been compatible with US consumption needs; more on that later.
Estimated Domestic Demand
This is where USDA’s “residual” is embedded. Last year 109MM HWT’s vs forecast this year of 98MM HWTs, is too low. I believe 105MM HWTs is more realistic as domestic demand is the closest thing to inelastic that there is. Millers buy by the ton and sell by the pound. Alpo, Budweiser, Kellogg’s, etc., are not going to alter their formulations with rice prices being such an insignificant part of their overall cost structure. As mentioned above, the quality of other Asian origins prohibits it from being an alternative supply in our domestic markets. USDA is suggesting that domestic demand will be down 11MM HWTs year on year, while usage milling data (private estimates as USDA does not provide weekly data) to date suggests it is on pace with last year.
U.S. Rice Export Sales
In the end, are where musical chairs is played, is the only category from which we can ration demand and therein lies the problem. USDA considers 20MM HWTs to be pipeline minimum and they will not go below that number. The glaring problem is export sales through the first 14 weeks of the marketing year are 36.6MM HWTs vs. 28.3MM HWTs one year ago; an all-time record sales pace this early in the year. That leaves only 16MM HWTs available over the next 38 weeks. A Herculean feat to say the least…not even certain if possible. At a minimum, we will require SIGNIFICANTLY higher price levels going forward.
Global Rice Competition
Global trade is estimated at 44.37MIVIT this year with the US at 3.02 MMT and our only competitor in this hemisphere, “Mercosur” (Brazil, Arg, Uruguay, Paraguay) forecast to export 2.57MMT. The problem is that Brazil, this hemisphere’s largest producer and consumer last year, net imported 537MT vs forecast of 900MT this year, while Mercosur exported 2.985 YA. By my math, that suggests Mercosur has approx. 800MT less to sell this year. So, if our competition in this hemisphere has 1/3 less to sell and we are already so far ahead of last year’s sales pace, how can US exports not be substantially higher (other than the fact we don’t have it to sell)? Lastly, this year’s plantings in Brazil are forecast to be the lowest in 19 years due to a weak Real with inputs being quoted in dollars. Furthermore, plantings, which are normally done by the end of October, are only 40% currently due to excessive rains in rice-producing areas which portend a problem for next year.
On Oct 30 were 1196, of which only 477 remain, and of those, less than 200 are not owned by commercials (Est). What is so unique is the fact that most of the cancellations were done by domestic mills, and this is the first time that I can recall millers EVER stopping this quantity in Nov. Sixty percent of domestic milling is done by two co-ops who historically pool all of their inventories, mill the rice and pay the farmer based on returns from milled rice sales, which they have historically done poorly from a producer’s perspective. As a result, there has been a significant reduction in producers participating in the co-op pools in recent years with a significant increase in on-farm storage.
January 2020 Rough Rice Contract Price Action
In the January contract.: Since May 1, 2019, the low has been 11.06 and the high was 12.56 on Sep 19, 2019. Keep in mind that on May 1, 2019 ( when the low was made), acreage was expected to be 700k acres higher, which would have resulted in ample supplies, but those were lost due to late planting, Fund participation in the last year has ranged between 2,000 long to 2,000 short. Currently, I estimate funds to be short 1,500. Point being when they decide to exit shorts and build longs, who will be there to sell to them as commercials are cash short?
Bubba is not going to stop drinking beer and Fido is not going to stop eating dog food. By the time we get the December 1st stocks number on January 12th, 2020, it will be a little late to start whatever rationing will be needed and the price necessary to do so will be prohibitive. We have never had a situation like this domestically so this is uncharted territory. The only other domestic situation that comes to mind was the Hard Red Spring wheat in 2008. Take a look at that chart. When rice made a big move in 2007/2008 front month went from $12 in Nov to $25 before the May delivery. Open interest started roughly here and peaked before May deliveries well above 20,000. At the same time, all ag-based commodities were on a roll, which is obviously .not the case this year, but the US rice fundamentals are more bullish today than in 2007/2008 or ever in history for that matter. I reiterate it is a small contract with huge volatility so not for everyone’s participation. With Jan currently at $12.10, I consider the downside to be .50 cents ($1,000 per contract) and the upside…pick a number…$3, $4, $5,+++. I do not look for the market to top until late spring or beyond, so in Dec, will need to roll longs to March and in April, roll to the May.