Views Update: Turning Bearish Rice

We have initiated a bearish view on front-month CBOT rough rice in our commodities strategy table, as prices are approaching resistance and we expect them to head significantly lower in the coming quarters. Three factors underpin a negative outlook for rice prices. First, technical indicators point at an imminent decline in prices. Second, Thailand's government is exhibiting signs that it will scrap its subsidy policy, which has been a key supportive factor for CBOT rice prices over the past year. Thirdly, the overall supply picture remains very bearish for prices, with global surpluses and stocks increasing on the back of the strong ongoing 2013/14 global crop. We have chosen to express our bearish rice view through CBOT prices due to the relative liquidity of the contract versus Asian equivalents.

All technical indicators point to imminent weakness in rice prices. Prices are now approaching resistance that comes in at US$16.75/cwt, while the relative strength index (RSI) is in overbought territory on the daily chart, to levels at which prices have typically recorded a significant decline.

Thailand's government is increasingly showing signs that it intends to scrap its rice subsidy programme and release part of its bulky rice stocks in the international market, which will prove bearish for prices. Indeed, the scheme is currently one of the most supportive factors for international rice prices, as it has made Thai exports uncompetitive and led to a sharp drop in outward shipments, which usually account for over 30% of global exports.

Weakness Imminent
Front-Month CBOT Rough Rice, US$/cwt (daily chart) & RSI (below)

We have initiated a bearish view on front-month CBOT rough rice in our commodities strategy table, as prices are approaching resistance and we expect them to head significantly lower in the coming quarters. Three factors underpin a negative outlook for rice prices. First, technical indicators point at an imminent decline in prices. Second, Thailand's government is exhibiting signs that it will scrap its subsidy policy, which has been a key supportive factor for CBOT rice prices over the past year. Thirdly, the overall supply picture remains very bearish for prices, with global surpluses and stocks increasing on the back of the strong ongoing 2013/14 global crop. We have chosen to express our bearish rice view through CBOT prices due to the relative liquidity of the contract versus Asian equivalents.

Weakness Imminent
Front-Month CBOT Rough Rice, US$/cwt (daily chart) & RSI (below)

All technical indicators point to imminent weakness in rice prices. Prices are now approaching resistance that comes in at US$16.75/cwt, while the relative strength index (RSI) is in overbought territory on the daily chart, to levels at which prices have typically recorded a significant decline.

Temporarily Turning Into Backwardation
Rough Rice - CBOT Futures Curves (US$/cwt)

Thailand's government is increasingly showing signs that it intends to scrap its rice subsidy programme and release part of its bulky rice stocks in the international market, which will prove bearish for prices. Indeed, the scheme is currently one of the most supportive factors for international rice prices, as it has made Thai exports uncompetitive and led to a sharp drop in outward shipments, which usually account for over 30% of global exports.

US And Thailand Driving CBOT Prices
Rice - CBOT Rough Rice & Select Countries Rice Export Prices (US$/tonne)

Thai exports are likely to accelerate towards the end of the year, driven by sales of the government's old-crop rice stocks and by the need to fund the 2013/14 crops' procurement with the main harvest coming online in October. The recent depreciation of the Thai baht (by 12% since April 2013) is also likely to boost the country exports' competitiveness, which may accelerate rice shipments. This is all the more valid that Thailand's main competitor on the rice market, Vietnam, has not witnessed as much weakness in its currency in recent weeks.

Year Of Plenty
Select Countries - Rice Production ('000 tonnes)

A pick-up in Thai exports into an already well-supplied market will push international prices down. After 2012/13's disappointing crop, we expect a rebound in production in 2013/14 as generous government price support programmes in China, Thailand and Indonesia support plantings and adoption of high yielding rice varieties. Meanwhile, the good start to the summer monsoon in India bodes well for the main rice crop. We forecast the global market to record an expansion in the surplus and stocks-to-use ratio in 2013/14, which will help international prices average significantly lower in 2014 at US$13.00/cwt, after having broadly stagnated in 2013 at US$15.00/cwt ( see ' Rough Rice To Average US$13.00/cwt In 2014', July 30).

Risk To Price Outlook

We see risks to our bearish rice view coming from elevated rice prices in the US. The ongoing tightness on the US domestic rice market due to decreasing surpluses in the past three years is keeping local prices on an uptrend. Although the US is only a secondary exporter, CBOT prices, traded in the US, may be influenced by the local supply picture. As a result, should US prices remain elevated, CBOT rice prices may stay more supported than expected, even if Thailand manages to increase its exports. Technically speaking, we would consider closing our bearish view should we see a decisive close above resistance that comes in around US$16.75/cwt.

BMI COMMODITIES STRATEGY TABLE
Entry Date Entry Level Gain/(Loss) Rationale
Note: Returns do not take into account roll yield, unless stated otherwise.Sources: BMI, Bloomberg
AGRICULTURE
Bearish Rough Rice (front-month CBOT) 29-Aug-13 16.65 0.00% Thailand will release its stocks and scrap its subsidy policy, very well-supplied global market.
ENERGY
- - - - -
METALS
Bullish Platinum (spot) vs Gold (spot) 29-May-2013 1.055 2.76% Supply disruption in South Africa, growing autos use to support platinum prices. Bearish gold.

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