The Rice Trade: How to Profit from this Commodity

The commodity that feeds nations, grain by grain!

The Importance of the Global Rice Trade

Rice trades feature less prominently than other agricultural commodities such as wheat, soy beans and maize. In fact, far less rice is traded per annum overall than the aforementioned agricultural commodities. Up until the 1980s, the rice trade had largely been dormant for 25 years. However, a massive worldwide expansion in rice production took place as agricultural trade liberalization came to pass. This was implemented as a result of the 1994 General Agreement on Tariffs and Trade (GATT). Nowadays, the total quantity of rice traded is approximately 42M tonnes. This is substantial, especially when viewed in the context of total rice traded in the 1980s (10M – 12M tonnes).

At its present level of 42M tonnes, the quantity of rice represents approximately 9% of worldwide production. This is more than double the total rice output of the 1980s. When discussing the global rice trade, it is important to understand that rice is perceived as a commodity with strong political linkages. Since Asian countries typically place tremendous significance on rice, the performance of governments is often evaluated according to the rice trade. In order to maintain price stability, regulators are duty bound to place strict controls on the rice trade in order that domestic rice production, consumption and availability are sound.

A large part of the rice trade is facilitated by way of G-G contracts. These government-to-government trade contracts are involved in the import/export of rice from country to country. In fact, various state agencies in Asian countries have been expressly set up for this very purpose. These types of agencies include The Bureau of Logistics of Indonesia, The National Food Authority of the Philippines, and the BERNAS of Malaysia. There are many similar government-run agencies expressly geared towards the import and export of rice. These G-G contracts are important determinants in stabilizing the price for rice.

The global rice trade has been impacted by various shortages over the years. During the 2007/8 rice crisis, countries like Vietnam and India were compelled to adopt an export ban on rice. Similarly, countries like Indonesia, Nigeria and the Philippines were scampering to save as much rice for domestic consumption and stability as possible. During 2013/14, Vietnam was responsible for the export of approximately 400K tonnes of rice through its government-to-government exports to the Philippines, Malaysia, Indonesia and various African states. Rice is an important commodity in Asia, and the industry is carefully monitored to ensure price stability and all times.

 

Which Countries are Responsible for the Bulk of the Rice Trade?

Approximately 80% of all trade in rice is accounted for by 5 rice exporters. These include 4 Asian countries in Vietnam, Thailand, Pakistan and India. Incidentally, Thailand has been a top rice exporter for well over 40 years. And despite the fact that these countries are primarily engaged in exporting rice, they are also huge consumers of rice. As such, these countries place significant emphasis on maintaining optimal strategic reserves of rice. In terms of imports, there is greater fragmentation of the market. When viewed holistically, the top 5 importers of rice are only responsible for 30% of total global reduction, whereas the top 10 rice importers account for less than half of all rice imports. Some 25% of all rice imported makes its way into Asia, notably China. Other countries that import huge volumes of rice (approximately 50%) include Middle Eastern nations and African nations. Over the past 10 years, the total value of rice imported into the Middle East and Africa has doubled – 10M tonnes to 20M tonnes.

How do Rice Futures Work?

Rice is traded in many different formats, notably rice futures. In order to generate profits from trading rice, one needs to take a position – either bullish or bearish – on the rice futures contract. If you are optimistic about the future price of rice, you will take a long position at a futures exchange. It may be that your perception of a rice futures trade is bullish, and you wish to go long on the contract. When you’re ready to place your trade, you do not pay the full contract value; you only pay a deposit with an initial margin in order to open up the futures trade. Ideally, a long rice futures strategy would require you to buy low and sell high. Your profit will be the difference between the selling amount and the purchase amount. Your initial margin will be evaluated against the amount of profit.

It should be borne in mind that there is exceptionally low margin in rice contracts. The return on investment (ROI) can be substantial when trading rice futures, provided you call it correctly. One should always be cautious when matters of leverage and margin are concerned since positive and negative outcomes are entirely possible. Traders will be required to provide the necessary funding in the event that the trade goes against them, and this is where the merits and pitfalls of leverage come into play. In order to maintain an open position on your futures contract, it is necessary to add funds to your trading account.

You may take a bearish position on rice, in which case you short rice futures trades. You can generate a profit by going short on a futures contract over a one-month period. Each contract in a rough rice futures contract is reflective of 2,000 hundredweights of rice. You will be required to place an initial margin down (initial trade amount). Since you have opened a short position in rice, any future price which is less than the initial CBOT price will yield a profit for you. Note that you have adopted a short position which means that the future price at which you buy back the contract is less than the price at which a sell the contract. The difference is your profit. The typical margin requirement for rice commodity purchases in futures contract is 8.86%.

What Types of Rice Commodities are Traded?

There are essentially 2 broad categories of rice that are available for trading purposes: non-fragrant rice and fragrant rice. Non-fragrant rice includes things like glutinous rice, white rice and parboiled rice. The fragrant rice variants include jasmine rice and basmati rice. The worldwide trade in basmati rice has increased fourfold from 1M tonnes to 4M tonnes. Pakistan has seen a sharp reduction in its total market share while India has monopolized the industry. Jasmine rice grew anemically between 2005 and 2013, with countries like Singapore, the US, Ghana, Hong Kong and China responsible for much of the demand. Imports from China will continue to diversify moving forward, and we can expect rising incomes in the worlds #2 economy to be responsible for a huge spike in imports.

Since the global financial crisis, there has been a sharp uptick in self-sufficiency, with solid reductions in imports. To countries which have dominated the scene of late include China and India. Surprisingly, it is India that now rules the roost as the top exporter, while China is the top importer. During 2013, China imported 3.5M tonnes of rice – dislodging Nigeria as the top importer in the world. In terms of future trends, it is clear that India is at the top of its game. Thailand has also recaptured its market share, and is on the ascendancy. One of the most important market trends vis-a-vis rice production (imports/exports) is the increasing popularity of rice consumption in countries across the Middle East and Africa. By 2040 it is estimated that 112M tonnes of rice will be needed, with some 40% required by African countries.