🌾 Your Guide To Investing In Rough Rice, Arguably The World’s Most Important Grain.
Rough rice is slightly different to white or brown rice in that it’s the unmilled and unpolished version that’s harvested directly from the plant. It then gets turned into brown rice by removing the outer hull. Further processing & layer removals then turns brown rice into white rice we all know and love. So, rough rice produces not only brown and white rice, but a number of by-products too, like the hull, rice bran, and broken rice (just another term for pieces of milled rice).
What Can It Do For You
🧺 Portfolio Diversification. As always, adding commodities to your portfolio can help diversify and lower risk. Adding rough rice to your portfolio means owning an asset that tends to act differently to other asset classes, and even to other commodities. Furthermore, rough rice can act as a hedge against inflation & a weak US dollar. This is because as a food commodity, rough rice will always be in demand. When the economy undergoes inflationary periods, food commodity prices could rise in response to these conditions.
💰 Profit. Looking at the price chart below, like a number of other commodities, rough rice can certainly undergo periods of volatility and price spikes. Because there’s such a high demand for rice, any changes in supply can be reflected in its price. In the long term, climate change can certainly impact supply with prolonged droughts, and growing populations in major rice-consuming regions could certainly mean increasing demand for the grain. However, there are a number of risks that could dampen rough rice prices, including competition with other agricultural grains, and potential changes in consumer preferences in major rice-consuming regions such as China and India.
What Affects Rough Rice Prices
There are several key factors that are involved in moving the price of rough rice:
- 🇮🇳🇨🇳 India & China Production. India & China both produce more than ~50% of the world’s rice supply. Any major events that can affect production in these countries will certainly affect prices. Production has been steadily increasing over the years to meet increasing demand.
- 🇮🇳🇨🇳🌍 Global Demand (Especially India & China). On top of being the two biggest rice producers, both India and China are also the two biggest rice consumers, consuming about ~50% of the world’s rice supply. As the world’s population increases, demand is also be expected to increase, and USDA data has shown that consumption has been increasing over the years.
- 🏛️Government Policy. Things like subsidies and trade policies can definitely have an impact on rice prices. In fact, poor policy-making was one of the main factors that led to the 2008 global rice crisis, as seen in the price chart above. For example, India (one of the biggest rice producers) implemented a ban on rice exports prior to the crisis, which really caused a lot of panic.
- 📈 Stock Levels. As mentioned in previous articles, stock levels of a commodity can be a key indicator on supply and/or demand levels, which can then lead to speculation in the market. Over the years, on top of being one of the biggest producers and consumers of rice, China is continually building its rice stockpile, representing a staggering 65% of the world’s stockpiled rice according to the most recent USDA report. If China were to start dipping into this stockpile, it could suggest decreased rice production
- ☀️ Weather/Climate Change. Rice is water-intensive crop. You might have seen pictures of farmers planting rice seedlings in flooded paddy fields. Poor weather conditions (like drought) in India &/or China could lead to decreased production & therefore supply constraints, resulting in increased prices.
- 🛢️ Oil Prices. Yup, crude oil prices can also have an effect on rice prices. Here’s how:
Indirectly: Oil prices are linked with other kinds of grains like corn, soybeans and wheat because of their biofuel applications. Rice can also be turned into biofuel, but a lot of the focus is on the other grains. So, when oil prices rise, grains like corn and wheat tends to also follow, which could then boost demand for rice, lifting its price too. In fact, this exact scenario was the spark that set off a series of events that led to the 2008 rice crisis.
Directly: On top of being water-intensive, rice is also energy-intensive. It uses machinery to irrigate fields, maintain water levels, harvest and to dry the grains. On top of that, fertilisers are produced from natural gas, also an energy commodity. So, rising oil prices leading to rising natural gas prices and therefore potentially more expensive fertiliser.
📈 Breaking down the 2008 global rice crisis
💥 Setting the stage: It was basically a domino effect that led to one thing after another, which eventually led to the price spike. There were several factors that made the first domino fall: rising oil prices, a weak US dollar, and biofuel subsidies for corn and a number of other grains. The biofuel subsidies essentially turned these agricultural commodities into energy commodities, which contributed to the increase in prices. The price increases across a whole range of essential commodities created an atmosphere of uncertainty, and eventually, panic.
🚫 Export bans: In India, bad weather reduced wheat supply, and with rising oil costs, importing more wheat was expensive. So, the Indian government decided to significantly restrict rice exports to stabilise the country’s food supplies. As mentioned above, India is one of the biggest rice producers in the world, so this really caught everyone off guard, especially the Philippines, the biggest rice importer. This was the force that pushed the first domino down. In Vietnam, they banned new exports because of fears that the unusually cold weather at the time could impact supply. With both countries banning rice exports, it caused more uncertainty in the market, the second domino to fall. This really made a lot of rice-importing countries nervous, especially the Philippines. Other countries also followed suit, restricting exports or introducing high export taxes. The thing is, what made the high prices stick was the acceptance of these high prices by importing countries like the Philippines, paying about $1200 per ton of rice at its peak (from about $335 per ton pre-crisis). Other countries also announced plans to increase their stockpile (they eventually didn’t), which also sent prices higher.
🏛️ Organisation of Rice Exporting Countries: Although Thailand never restricted exports, their statements and plans also contributed to the price increases. To top it off, they put forward a proposal to create a rice exporter cartel called the Organisation of Rice Exporting Countries (OREC), similar to OPEC for oil. It never took off because of worldwide public opinion, but the proposal itself created a lot of market fear.
🇯🇵🇺🇸 Japan & the US saves the day: Under WTO agreements, Japan imported and stockpiled US rice, about 1.5 million tons of it to be exact. The Philippines knew this and publicly entered into negotiations with Japan. Normally, the American rice couldn’t be re-exported, but anonymous remarks made by a US trade official which suggested that the US government would allow Japan to export its rice gave relief to a lot of rice-importing countries, subsiding the panic and fear in the market. Almost immediately, prices fell and started to normalise, as seen in the price chart above.
What Is It Used For?
The rice plant doesn’t just produce rice. There are a number of byproducts that are produced after processing, each with different use cases.
- 📦 Rice Hull. This is the outermost layer of the rice grain, straight from the harvest. Rice hull is inedible, but you can use this in mulch, abrasives, or even packing material.
- 🥣 Rice Bran. Once the hull is removed, you’re left with brown rice, with bran layers intact. Removing this rice bran produces white rice. Rice bran can be used in cereals, mixes, and a number of supplements due to its high nutritional content.
- 🍚 Brown/White Rice. The staple grain we’re all accustomed to. Rice can also be used to make rice milk and alcoholic beverages, such as sake.
- 🍘 Broken Rice. Broken rice are just small pieces of the rice grain. This can be ground up to be used as rice flour, which can then be used to make crisps, cereals, snacks, etc.
Other by-products include rice bran oil, rice starch, brewers rice, and even the straw from rice is being increasingly looked into as a source of biofuel.
The Case Against Rough Rice
There are a couple of risks involved should you want to invest or trade in rough rice. Firstly, Chinese stockpiling of rough rice could really put downward pressure on prices as this could lead to an oversupply in the market should they decide to sell-off some of the supply. Furthermore, increasing wealth in emerging economies (especially in India and China) could potentially change consumer preferences and take away rough rice’s market share, resulting in lower demand. Last but not least, we have to remember that it’s a staple crop responsible for feeding billions of people. If rough rice acts too much like a speculative financial asset than an agricultural commodity, government policies may be introduced to resolve this.
The Case For Rough Rice
Rough rice will always be in demand since it’s a staple crop for more than half of the world’s population in multiple regions. This demand is expected to continue to increase due to population & economic growth in emerging economies like India & China. As such, rough rice can certainly be used as a hedge against inflation and/or for portfolio diversification. Furthermore, bad weather and climate change in the long term can certainly have an impact on supply. We’ve already seen the impact of droughts on production levels for some countries, and this may get worse. As we’ve seen above, because rice is in such high demand, fears of supply shortages due to droughts or otherwise can really affect prices.
Popular Ways To Invest In Rough Rice — Pros/Cons of Each
Like some of the other agricultural commodities, you can’t really invest in physical rough rice. Here are some of the more popular ways instead. If you’re still confused about how any of these work, refer back to our basics newsletter for a refresher.
- Rough Rice ETNs. Unfortunately, there are no ETFs that focus solely on rough rice, but there are ETNs that invests in a range of commodities, including rough rice. Because of this, on occasion, there may be times when the actual price of rough rice & the price of the ETN may differ since they don’t just invest in rice. Regardless, they’re traded on stock exchanges, so they’re pretty easy to buy and sell. Depending on which broker you go with, you may be charged with trading commissions. ETNs also charge an expense ratio, or management fee that gets taken out of their total holdings and is then reflected on your account. Just be aware that since it’s an ETN, you are essentially buying a bond, an IOU, a debt note, and not in actual, physical rough rice. Be sure to read the fine print & understand the risks and costs involved.
- Rough Rice Stocks. Similar to a number of other agricultural commodities, unfortunately, there are no public companies that solely focus on producing rough rice, but there are large public companies that provide general agricultural products to farmers & producers, including the seeds. Because of this, you aren’t directly following rough rice prices since there are other factors at play. As always, you may want to consider looking at the company’s annual reports (especially operational costs), portfolio of what products & assets they have, what research & development they’re currently conducting, and potential product-line expansion plans.
- Rough Rice Futures Contracts. A binding agreement traded on futures exchanges between two parties where they agree to buy/sell rough rice at a specified time in the future with an agreed-upon price. A standard contract deals with 91 metric tons of it! These futures contracts are settled physical delivery after the contracts have expired. Because you are using a significant amount of borrowed money, even small price changes in rough rice can either lead to massive profit, or massive losses beyond what you paid for, potentially leaving you in massive debt. They are certainly high-risk and not recommended for beginners. Further, fees associated with futures trading include broker commissions, and exchange/clearing fees.
TL;DR — Is It The Right Investment For You?
As always, it depends on what your aims are. As an agricultural commodity that’s responsible for feeding billions of people, rough rice can be used as a hedge against inflation & for portfolio diversification. In the long-term, China’s massive stockpile could certainly put downward pressure on prices should they want to sell some of this back to the market, and decreases the chance of a supply shortage. However, since they’re also the biggest consumer of rice, it’s unlikely that they would dump it on the market. Furthermore, demand for rice has steadily been increasing, according to the USDA, and is expected to continue to increase as world population increases. A more pressing concern is the impact of climate change on rice production. As mentioned above, we’ve already seen price swings in response to fears of supply disruptions due to bad weather. Rising global temperatures could certainly increase the drought events, which has the potential to disrupt rice supplies, which can create panic in the markets, resulting in volatile price swings.
🧺 If you are considering adding rough rice to your existing portfolio or bundling it with a number of others, you may want to consider doing dollar-cost averaging (regular investments over time) to build your rough rice position so you can take advantage of any volatility in the market.
💰 If you are considering adding rough rice for speculation and profit, you may want to monitor the factors that affect rough rice prices mentioned above. You may also want to keep track of monthly reports of world production, consumption & stock levels released by the USDA, so you can keep track of supply & demand. In addition to monitoring the factors mentioned above, you may also want to consider performing some technical analysis on rough rice’s price chart to help consolidate trends and patterns to help with your decision. That being said, its prices can also swing unexpectedly and dramatically, so be prepared and have an exit plan in place.
As always, if you are unsure, check in with a professional financial advisor before making any moves.