As California rice prices hit successive all-time highs, what comes next?

Sources in the California rice market are reacting with increasing concern to the prospect of a historically small crop this year, on the back of an already disappointing 2021 harvest.

According to the US Department of Agriculture's 2021 Acreage Report, planted area in California totaled 417,000 acres (168,754 hectares), down by 100,000 acres (40,469 hectares), or 19%, on year as water allocation restrictions curbed farmers' ability to plant.

California's 2021-22 rainy season got off to a good start, with heavy rain and snow for periods of Q4 2021, and hopes of a return to a "normal" crop size rose. However, much of this precipitation was absorbed directly into the parched ground, rather than filtering down to reservoirs or topping up the snowpack all that much.

As the La Nina weather phenomenon returned with a vengeance in the early days of 2022, though, precipitation was diverted to the north of the state and the state's rice country has had an abnormally dry Q1 2022. Because of this, the state's most important reservoir for rice farmers, Lake Shasta, is at unusually low levels for this time of year, while Lake Oroville has not been as significantly affected (see chart).

Amid low irrigation water levels, one source said crop size "could be down again by another 10%-15% from last year putting the crop closer to 300,000 acres instead of 400,000 acres like last year and nowhere near normal production of about 525,000 acres." A farmer concurred, saying that "there's going to be rice acreage closer to 300,000 than 400,000 if things hold."

One marketer revealed that the last time planted area in California failed to reach 400,000 acres was in 1992, raising the prospect of the smallest crop in at least 30 years. With water allocations due to be revealed in the coming days and farmers expected to begin planting not long after, time is running out for a dramatic turnaround in precipitation levels.

All-time highs

Naturally, these supply dynamics have had a huge impact on prices. S&P Global Commodity Insights' Platts assessment of US #1, 4% broken white rice touched an all-time high of $1,270/mt FAS FCL Oakland March 17 (see chart), up by $700/mt from Platts' all-time low five years ago, with Calrose paddy prices witnessing comparable gains. The previous all-time high was set in 2008-09. While this predates Platts assessments, sources report that US #1, 4% broken white rice reached around $1,250/mt FAS FCL Oakland during this period.

In turn, this has caused issues for marketers. In a normal year of production, around 50% of California's crop is sold within the US, 37% is exported to Japan and South Korea to fulfil their World Trade Organization commitments, 8% is sold to the Middle East, and the remaining 5% is sold to neighboring Canada and European destinations.

At present, marketers have concentrated on their core buyers in the domestic market and East Asia, with exporters also hesitant to commit to container sales to smaller markets due to a chronic shortage of containers on the US West Coast.

However, even for buyers purchasing on a breakbulk basis because of WTO obligations, supply issues are arising. In Japan's March 18 Minimum Access tender for 12,700 mt of US medium grain for delivery July 10-Aug. 30, no bids were received. One major miller cited both supply and logistical issues for that time of year as the likely reasons.

On the same day, South Korea announced that no awards for US rice had been made in its Feb. 28 Minimum Market Access tender. Two 22,222-mt US-specific brown medium grain lots were up for grabs, but a source close to the tender revealed that "both contracts were single-bid, and the bidding price was high enough that [South Korea] may not have purchased even if there were more bidders."

Losing market share

What has already begun to emerge in these East Asian tenders is likely to continue later this year as marketers come to grips with the likelihood of a crop that is only two-thirds of a normal crop. One California-based source has even remarked that "with projections of an even smaller crop in California this year, some or most of the US sales to Korea will need to come from the US South" in the coming year.

While such demand has not been shared by all sellers in the South, one major mill relayed that it has been receiving huge levels of demand from Jordanian buyers who had previously been regular buyers of medium grain Calrose. Sale prices of close to $800/mt CIF NOLA have been reported for milled Southern medium grain to the country in recent weeks.

Sources in California also fear that market share in the Middle East and Europe could also be eaten away by a resurgent Australia, which has witnessed two successive years of dramatic production growth after drought-affected harvests in 2019 and 2020. Already, marketers who concentrate on container sales rather than breakbulk business to East Asia have voiced concerns.

"I am losing business at these prices," one such exasperated exporter said. Despite this, low supply has ensured that farmers are dug in and are showing no signs of lowering their paddy offers.

"I don't think they would sell at any price right now," a major miller said.

As a result, a second major miller relayed expectations that US #1, 4% broken white rice "will probably go up to $1,300/mt [FAS FCL Oakland] shortly."

Uncertain future

Trends that have only begun in recent months, such as suppliers being hesitant to offer in East Asian tenders due to supply uncertainty and exporters sharply losing market share in destinations including the Middle East, are only set to continue in the coming months.

In this context, some millers have quietly voiced fears of what could happen if farmers plant a large or even a normal-sized crop in 2023. Will European and Middle Eastern buyers flock back to the California market to absorb what is left over once domestic, Japanese and South Korean requirements are fulfilled? Or will South Korea and other buyers turn their noses up at Calrose, content with the quality and lower prices of Southern medium grain and rice from other origins?

The answer will almost certainly lie somewhere in the middle of these two options, but it is not something that many people in the California market enjoy thinking about at present.