Rice Perspective—January 2008

Supply Conditions in Key Markets. The decision by key exporting countries to curtail exports has impacted global rice supply. With the rise in wheat prices last year, the Indian government decided to reduce rice exports in an effort to divert consumption from wheat to rice to build domestic stocks. China has also witnessed an increase in domestic demand, and is likely to import rice. In November, Cyclone Sidr caused severe damage to Bangladesh's paddy crop in the southern region. This has forced the country to purchase 500,000 tons of rice, putting additional pressure on world rice supply. Meanwhile, the high incidence of pests and diseases in Vietnam's major rice-producing region has led to drop in production there. In addition, Indonesia has reportedly lost 70,000 tons of rice due to floods in the central Java district. Relatively stagnant global yields and low acreage response will cause even further supply shortages. While rising commodity prices typically encourage greater crop plantings, the higher global prices for corn, wheat, and soybeans offer tough competition for rice production. Still, with only 7% of all rice traded in the global markets, the climbing world demand offers strong growth potential for this crop.

U.S. Rice Market. The combined effects of the weaker dollar, production constraints in Australia, and export bans by major exporters India and Vietnam have benefited U.S. exports. Domestic rice prices are the highest since 1980/81. The 2007/08 season average price is forecasted between $10.90 and $11.40 per cwt. The Federal Reserve's decision to cut interest rates could lead to even more bullish prices. However, the higher prices have not translated into higher acreage for rice. Due to seed supply issues in 2007/08, rice areas declined in Arkansas, Missouri, and Texas, expanded for Louisiana, and remained unchanged in Mississippi and California. Record yields in all states (with the exception of Texas) helped offset some of the drop in planting area. Rice remains one of the more expensive crops to plant, and even more so with rising fuel and fertilizer costs. Of course, once the new federal farm bill is implemented, this could influence U.S. acreage planted in 2009, although market prices will likely dominate the decision.

Changes in Global Consumption Trends. While Asian countries are traditionally large rice consumers, with rising incomes in the region has caused a shift in consumption trends toward other food products. Indeed, rice consumption in South Korea is now the lowest in many years. In Japan, rice consumption is decreasing every year. And with more and more Japanese farmers abandoning rice production, Tokyo recently launched a pilot plant to produce ethanol from rice. The Japanese government is expected to pay farmers to grow two types of super-harvest rice varieties suitable for ethanol conversion. It is also expected to pay half of the seed money. If successful, two other ethanol plants are in the works.

In contrast, demand from Europe, Australia, and particularly Africa has been growing. With increasing urbanization in East Africa, consumers thee are consuming more rice, rather than the traditional grains like corn. Nigeria is one of the largest importers of rice in Africa, importing $1.3 billion annually. Consumption in Kenya is likewise increasing, and should double by 2015.

With changing consumer preferences and higher incomes, the aromatic rice market has also been growing. In the United States, aromatic rice accounts for 11% of imports, a majority of which is Jasmine rice from Thailand and Basmati rice from India and Pakistan. China has also been increasing its imports of Basmati rice from India. In 2007, the price of Basmati rice jumped 30%, mainly due to production shortages, increased demand, and the appreciation of the rupee against the U.S. dollar.

Inn summary, with growing global demand, production shortages, and the high prices of competing crops, the rice market shows no sign of slowing down.