Thursday, 9 April 2020
Rice, the forgotten commodity supporting wheat prices
As we move through unprecedented times, we often have to look outside the box to find the drivers of markets. Over the past fortnight, wheat prices have been increasingly driven by global macroeconomics. However, as the macroeconomics are increasingly factored in, markets for products that are substitutable for wheat also become key to market direction.
One such market is rice, looking at the historical relationship between rice and wheat, as a rule of thumb, if rice markets get tighter there is generally support for wheat prices.
On the face of global supply and demand, the rice market does not look overly tight. Looking at the headline global level of stocks-to-use, we have seen continued stock growth, this in theory reduces the impact of the rice market on wheat prices. However, strip China out of the equation and stocks-to-use, while still forecast to grow this season becomes 18% tighter.
So if stocks are still forecast to grow, surely rice will have a minimal impact on wheat?
The most recent forecasts available for wheat markets, do not take into account the impacts that we are seeing in global markets from coronavirus. In particular there are expected to be large implications for movement of labour in Asia.
This is particularly true for India, last week the New York Times reported that Indian rice traders have stopped signing new export contracts due to labour and logistics challenges. India is the worlds largest rice exporter accounting for 25% of all exports.
Similar issues are expected in Thailand and Vietnam, who together account for a further 35% of global rice exports. Additionally short-term demand, as a result of stockpiling globally, this is expected to offer support to prices.
Since the beginning of March, Chicago rice futures (nearby) have gained $18.52/t (6%). The move higher in rice futures has followed the general trend in global grain futures, and whilst arguably not a direct driver of wheat prices, it could become one should the rice market tighten significantly.
Where is the evidence of this?
In 2008/09 we saw a dip of 2mt in global rice exports (excluding China), at the same time, production of wheat boomed, and wheat stocks gained significantly. The growth of wheat stocks did pressure prices, as it should, however there were individual peaks in rice markets which coincide with spikes in the wheat price.
I’m not saying that rice is an overwhelming driver of wheat prices, far from it, but we can’t ignore that in times of uncertainty external factors have an increasing influence on markets. Going forward it would be prudent to keep an eye on developments in labour and haulage in India, Vietnam and Thailand, as tightness in rice markets could offer isolated periods of support for global wheat markets as food security rises on the political agenda.
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