Market needs a spark in demand, particularly from foreign buyers, to reach upside price potential.
Although per-acre yields in Louisiana, Arkansas and Mississippi were reduced by about 200 to 300 pounds in the USDA’s October report, it wasn’t enough to significantly change market momentum.
The news for the rice market continued to be grim with the release of U.S. Department of Agriculture’s October 2016 Supply and Demand estimates. The overriding theme is large supplies combined with uncertain and uneven demand.
While USDA reduced its expectations for the 2016 crop size, it has not been enough to spark the market. Even with the weather difficulties in much of the Southern U.S. rice-growing region, USDA has only reduced per-acre yields by 200 to 300 pounds in Arkansas, Louisiana and Mississippi.
Although many analysts believe further yield reductions could materialize in future USDA projections, it seems abundantly clear it will not be enough, by itself, to change overall market momentum.
The major reason is that for every reduction USDA has made in production levels, it has made similar or larger reductions in overall rice demand projections.
Total export demand for the 2016/17 marketing year was reduced by roughly 2.5 percent in the October report, and cumulative export sales to this point could suggest even further reductions.
Through Oct. 6, total rice exports sales were down by 10 percent from the previous year. Most of the reduction in demand has been for long-grain rice, with both rough and milled exports down significantly from last year. With exports making up nearly 50 percent of all rice usage, the inability to find significant, sustained demand is troubling for this market.
Unfortunately, most signs point to continued struggles for rice export demand.Combined rice production for the 2016/17 marketing year for Thailand and Vietnam is expected to be up by more than 7 percent from the previous year and is expected to result in a 5 percent increase in their exports. This will likely keep their prices at significant discounts to U.S. prices.
Current prices throughout the Southern U.S. rice-growing region have been reported in the upper $9 to low $10 hundredweight level ($16 to $16.50 per barrel range).
With USDA reporting that 93 percent of the U.S. crop was harvested as of Oct. 17, there is hope that we have already seen harvest lows and may start to see minor price momentum.
Historically, futures prices have improved by 3 to 5 percent from the end of the year to the February/March timeframe. The market’s ability to maintain around the $10 cwt range despite the harvest of a near-record crop provides some hope that we could see seasonal improvement better than that historic 5 percent.
It does not seem to be unrealistic to assume as much as a 10 percent boost with our normal seasonal improvement. That would put upside potential in the upper $10 to lower $11 cwt level (mid-$17 to low $18 per barrel). For this to happen, however, it will likely require a spark from demand, and particularly, export demand.
Price prospects for the 2017 crop year will depend on how quickly the market can manage this year’s large supplies. While demand over the rest of the 2016/17 marketing year could play a large role, typically acreage and the potential size of the next crop is the largest market influence. Based on current new crop futures, it is difficult to see significant acreage shifts in 2017.
Simply stated, low commodity prices and current expectations for returns above variable production costs for most competing commodities likely do not offer enough incentive to make significant changes in 2017. Cotton is the only commodity that currently could make some claim for additional acres in 2017, given its recent price improvement.
However, significant reductions in industry infrastructure and the potential for significant 2017 PLC (price loss coverage) and ARC-CO (agriculture risk coverage—county) payments for commodities planted on generic base acres (old cotton base) likely limit upside potential in cotton acres.
Without a significant reduction in rice production in 2017, demand will have to be the primary driver for higher prices. Unfortunately, what the last several years have shown us is finding enough demand to boost prices has been highly problematic.