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FEATURE: Rice bucks pandemic trend for soaring food prices

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Platts Biofuelscan

FEATURE: Rice bucks pandemic trend for soaring food prices

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FAO food index up 40% on year, rice index down by 4.5% over same period

Favorable harvests, stocks in China, India help saturate rice markets

Production swings toward other commodities expected in Americas in 2021

While the delicate networks which make up the global food supply chain have been rocked by the fallout from the coronavirus pandemic, most notably lockdowns and freight shortages, rice prices have largely fallen since last year, bucking the trend for sharply higher food prices.

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A key indicator for global food prices, the UN's Food and Agricultural Organization's (FAO) Food Price Index reported in June that the cost of its basket of agricultural commodities was up by 40% on the year. Within its Index, vegetable oils were up by 125%, cereals -- including rice -- were 36% higher, and sizable increases for sugar, dairy and meat products were also recorded. However, in its specific Rice Price Index, the FAO recorded in June that rice prices were down by 4.5% on year.

The FAO's findings are borne out in S&P Global Platts assessments. Platts benchmark Black Sea corn (Ukraine) and Black Sea Sunflower Oil (Ukraine) assessments have risen by 65% and 90% on the year respectively as of June 1, with similar gains recorded for soy and other assessments.

While rice is a relatively fragmented market, Platts assessment of the closest thing to a global benchmark -- Thai 5% broken white rice -- was down 5.2% on the year as of June 1. Indian Parboiled 5% STX, another competitor for being a global rice benchmark, only fell $1/mt over the same period.

'Peculiar period in general'

'The FAO's rice economist, Shirley Mustafa, said rice's current position was "very unusual," but that it had been a "peculiar period in general" for agricultural commodities. Mustafa explained that the fast recovery in China's pig herd in the last year following an African swine fever outbreak had led to a surge in feed demand -- primarily corn and soybeans. Another factor is the impact the La Nina weather event had had on vegetable oil production, especially for palm oil following excess rain in Malaysia and Indonesia. Labor shortages affecting Malaysia's palm sector had also contributed to price strength in that market.

However, there was no single factor to explain the recent sharp agricultural price increases. Mustafa said it was a real "mix of things," also pointing to demand shocks in the second half of 2020 and the first half of 2021 as pandemic lockdown measures in various areas of the globe were eased, while the overarching influence of US dollar trends since the start of the COVID-19 pandemic "cannot be overstated."

The vast majority of rice, unlike many other agricultural commodities, is overwhelmingly consumed by humans as opposed to animals and so rice is largely sheltered from demand swings in the feed sector.

In addition to relatively unchanged demand in recent years -- aside from the pandemic-induced increase in rice intake and stockpiling occurring in Q2 2020 -- rice production had not faltered in the past year, while supply of exports had been "far more abundant," according to Mustafa, primarily led by consecutive year-on-year production increases in India. The FAO forecast 2021-2022 global production at 519.1 million mt (milled equivalent) in June, up by 1% on the year and by 3.2% from 2019-2020, matching consumption rises over the same period.

Supplies in Asia's production giants of China and India had also been boosted by old crop stock releases. In China, a portion of these stocks are sold at competitive levels to price sensitive export markets, primarily in sub-Saharan Africa. In India, old crop releases maintain a de facto cap on domestic prices and are often blended with or replace current crop for export. With only around a tenth of India's crop exported each year, the domestic market has a disproportionately large bearing on the country's export market compared with other major exporters.

Production, freight, feed

Looking ahead, though, the price spikes in other commodities are likely to lead to production shifts. As one major South American producer said, "rice is cheap" relative to other commodities and farmers are more than aware of this. While major production changes away from or toward rice are rare in Asia, this is not the case in the Americas.

This has already been borne out in the US, the world's fifth largest rice exporter. The US Department of Agriculture expects the country to produce 11% less rice this year, primarily as farmers in Southern states – notably Arkansas – have switched to corn and soy production in response to favorable prices.

While South America's main rice growing region won't begin planting for several months, farmers will be closely watching corn and soy prices in the US. According to data from Brazilian research institute CEPEA, while paddy prices in the country's main rice producing state, Rio Grande do Sul, were as of June 16 up by 17% on the year (see chart), this pales in comparison to the 47% rise for soybeans in Paranagua.

In turn, high freight costs are deterring fresh demand from many rice buyers. Even if buyers were willing to accept current freight costs, shortages of Handy and Handymax breakbulk ships, in addition to containers, mean that deliveries are being significantly delayed.

Coronavirus-related delays from the world's main supplier, India, are also posing difficulties. One major Singapore-based trader reported June 17 that while the load rate in the country's main breakbulk rice port – Kakinada – should be 2,500 mt/day, it is currently around 800 mt/day. As a result, end-users have been forced to rely on their stocks more heavily than usual.

With global corn prices in the high $200s/mt FOB, this also poses opportunities for Indian broken rice to be workable en masse for feed purposes, potentially leading to price rises for this grade, which is typically favored by price-sensitive markets. Separately, increasing prices in other commodities have led the Chinese government to encourage rice's use in pig and poultry feed, which may also increase global consumption, restrict supply and bring about a global rice price spike.

However, the FAO's Mustafa said she "wouldn't bet on it," citing the expected downturn in Bangladeshi demand going forward following improved production. Additionally, the economic constraints caused by the pandemic could exert downward pressure on prices. Mustafa also singled out Europe as the main source of "pent up demand," whereas major African and Asian destinations had not experienced as severe delays. However, modest price increases were not ruled out.

Rice is certainly bucking the trend of rising prices for other agricultural commodities at the moment. But with reduced production in some regions, a mixed demand and stocks outlook and ongoing logistical issues, it is unclear if rice will continue to be the beacon of stability in the agricultural commodity markets that it has been in the past year.