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May You Plant In Interesting Times

Keep an eye on the weather in top exporting countries

By Markham Dossett
Talon Asset Management
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In the WASDE report dated Nov. 9, 2011, the USDA reported a slight increase in U.S. rice yields and a slight decrease in world rice carryover. Thailand, the Philippines and Pakistan have all suffered major floods, but it is still unclear if all of the flood damage is properly reflected in the report.

Rice prices are historically high on a 10-year average, but flood damage in three of the top four exporting countries might result in even higher prices if major exporters turn to the United States to satisfy their rice requirements.

Weather Problems And Surplus Stocks

An interesting characteristic of the rice business is that many times third world rice producers and exporters associate rice availability and price stability with political survival. Therefore, the governments of those countries maintain tremendous rice stocks.

So even if they experience the major losses seen this year, they can draw down the larger surpluses, and we will not see a large demand for increased exports. Most weather forecasts are predicting another year of La Niña, which could create more weather events that cause flooding and typhoons in major producing countries.

Bulls in the rice market point to the weather problems in Asia and reduction of planted acreage in the United States to make a case for a continued rally.

Bears point to large, surplus stocks in Asia and a worldwide slowdown in commerce as a case for lower prices. No matter if the price of rice is $12 or $18 per hundred, the large co-ops in Arkansas maintain the basis for cash rice at $2 under the futures.

Consider A ‘Replacement Hedge’

My marketing strategy on 2011 crop would be to sell your crop in January 2012 and buy a March 2012 call option at the same time. This strategy is called a “replacement hedge.” If there is a major rice export sale, it would probably take place in January or February.

For the 2012 crop, if November futures prices in March are above $17, I recommend locking in half of the planned production with futures or options. I would also plant less rice because most rice growers will plant more rice at that price. However, if November futures are below $15 in March, I would plant more rice and wait until July to hedge. A $15 future price, less $2 basis, yields a $13 cash price. I think many farmers might substitute corn on rice fields at that price. Corn basis has been +80 cents in 2011 and may be more profitable than rice in 2012.

Futures trading involves significant risk of loss and may not be suitable for everyone. Therefore, carefully consider whether such trading is suitable for you in light of your financial condition.

Markham Dossett is Owner and Chief Broker of Talon Asset Management, LLC in Waco, Texas. Contact Dossett at (254) 741-1444 or markham@talonam.com.

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