Rice futures: a flexible tool for producers and speculators

Rice is a staple in the diet of 2 billion people around the world. It is one of the top three most consumed foods in the world. Southeast Asian countries are the largest producers and consumers of rice. High demand in producing countries determines low export share of this crop. Therefore, rice is among the most important commodities for food companies and trading networks as well as for investors and stock speculators.

The food industry predominantly trades rice on the spot market, entering into direct contracts with suppliers. The food industry trades mostly in rice on the spot market, concluding direct contracts with suppliers, while exchange traders prefer unprocessed rice futures, which provide flexible terms of transaction and delivery of the underlying asset.


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What do I need to know about rice futures?

Raw rice futures are traded on the Chicago Mercantile Exchange (CME). The tickers RK (open auction) and ZR (electronic bidding) are used to indicate the contract. Open pit bidding takes place Monday through Friday from 8:30 a.m. to 1:15 p.m. Central Time (CST). Bidding in the Globex electronic system takes place from 7:00 a.m. Sunday to 7:45 p.m. Friday, CST.

The size of the futures is 2,000 U.S. quintals or about 91 tons of rice. One U.S. centner, or handwheel, is approximately 45.35 kilograms. The value of the contract is measured in cents per U.S. cent. The minimum price step is 0.5 cents per U.S. cent or $10 per contract. Futures expire six times a year: in January, March, May, June, September and November.

Raw rice futures are deliverable. Delivery of the underlying asset is carried out within seven working days following the last day of the contract expiration month. Trading in futures is terminated on the fifteenth calendar day of the contract expiration month.

Producers, consumers, and exchange speculators are among the major traders in rice futures. Producers and consumers use the contracts to hedge risks of a sharp rise or fall in the price of this crop. In particular, producers open short positions to hedge against a decline in the price of rice. Consumers open long positions to hedge against a sharp rise in the price of the underlying asset. In turn, speculators try to make money on short-term price fluctuations.

What affects the cost of rice

The largest rice producers in the world are the countries of Southeast Asia. Also, the states of this region are among the largest consumers of this crop. In particular, China and India consume about half of the rice produced on the planet.

Fig. 1. Futures price chart in Fig. Source: SaxoTrader
Fig. 1. Futures price chart in Fig. Source: SaxoTrader

Asia's populous countries consume virtually all of the rice produced domestically, so Only a small portion of the total product reaches the international market. For example, the U.S. share of the rice production market is about 2 %. Meanwhile, the United States' share of total rice exports exceeds 10 %.

Rice consumption in China, India and other Asian countries is increasing. This is due to population growth in the region as well as to increasing wealth levels in Asian nations. The high demand for rice in Southeast Asia is major growth factor the value of this crop in the long term.

Other factors affecting the cost of rice include:

  • Rising prices of fertilizers and fuel. This factor led to a doubling of the cost of rice from 2004 to 2008
  • An increase in the average air temperature on the planet. This factor leads to dehydration of agricultural areas. Rice yields are highly dependent on soil moisture
  • The transformation of the economies of Southeast Asia. Many states in this region are transforming from agricultural to industrial countries. They produce less rice, yet the demand for the crop continues to grow. In the second half of the 20th century, for example, the Philippines fully met its own rice needs and exported surpluses. Currently, this country imports about 15 % of the rice it produces.

The cost of rice is straightforward correlates with the price of corn and wheat. When these crops become more expensive, farmers in the U.S. set aside more acreage to grow them. This leads to a reduction in rice production and an increase in the cost of rice.

Current situation in the rice market

Currently Global rice supply exceeds demand. Strong competition between Asian producers puts pressure on the price. In early April, Thai authorities increased rice export quotas. This state plans to sell at least 1 million tons of culture on the international market. Thailand's current rice stocks range from 10 to 13 million tons.

According to the UN Food and Agriculture Organization (FAO), this year, rice exports will increase the U.S., Vietnam, Pakistan, Thailand and Cambodia. The volume of exports will increase by 5 % compared to last year and will reach 39 million tons. According to FAO, global rice production in 2013-2014 marketing year will increase by 1 % and reach 497 million tons.

Meteorologists in Japan, the U.S. and Australia believe there is a high chance of an El Niño pattern in summer 2014. At the moment, the chance of a repeat El Niño this summer is 75 %. If the forecast of meteorologists comes true, the weather disasters will have a negative impact on rice yields in South America and some countries in Southeast Asia, including India. In this case, the cost of rice would rise significantly.

Figure 2. Rice futures and simple moving average. Source: SaxoTrader
Figure 2. Rice futures and simple moving average. Source: SaxoTrader

Thus, the excess of supply over demand creates conditions for a slight decline in the price of rice in the coming months. However, the threat of cataclysms caused by the El Niño phenomenon could lead to a poor harvest and an increase in rice prices. Technical indicators point to the likelihood of an increase in the price of this crop in the short term. The rice price chart is above the simple moving average.

The article was prepared by Sergey Krasikov, Senior Financial Consultant at Saxo Bank

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