By Dr. Kurt Guidry
From a fundamental supply and demand situation, the rice market continues to show signs of improvement. In its March supply and demand report, the USDA once again lowered ending stocks for the 2012/13 marketing year based on stronger export demand expectations for the remainder of the marketing year.
Looking at the demand side of the equation shows that year on year changes in both domestic rice use and export sales are expected to be up over 13 percent and six percent, respectively. Stronger domestic use seems to be an indication that the industry is slowly working its way out of some of the quality issues it struggled with over the past couple of marketing years.
Export Sales Up
Export sales have been strong thus far in the marketing year and are more than 11 percent higher than the previous year through the first two weeks of March 2013. While export sales to our top five customers are up about three percent from the previous year, the market has seen some fairly significant increases in rice purchases from countries like Costa Rica and Venezuela.
While it remains to be seen if these purchases are just temporary in nature or are more long-term changes in their purchase patterns, the increase in business has certainly improved the outlook for the 2012/13 marketing year exports. If the pace of exports continues at the current level, look for USDA to be forced to raise exports in future supply and demand reports and continue to chip away at ending stocks levels.
Despite the improving supply and demand outlook for the industry, futures prices have been primarily in a downward trending pattern since the beginning of February. Since hitting $15.90 per cwt ($25.76/bbl) during the first week of February, the September 2013 Rough Rice futures contract fell to $14.62 per cwt ($23.68/bbl) by the first of March.
The reduction of ending stocks with the release of the March USDA supply and demand report has seemed to have stabilized prices for the time being, and the market has moved slightly upward over the last week. Ample world supplies and stocks and expectations for increased competition in the world market may be some of the reasons that the market has been unable to translate a relatively positive domestic supply and demand situation into better prices. Also, news of increased imports of long-grain rice into the United States has also likely helped put some pressure on futures prices.
However, cash prices are typically much more influenced by local supply and demand conditions, and examining some of the prices being quoted in the state would suggest that the tightening stock situation is starting to be reflected in prices. After remaining stagnant in the $23 to $24 per barrel ($14.20 to $14.81 per cwt) for much of 2012, cash prices in south Louisiana have recently been quoted at $26 per barrel ($16.05/cwt).
With reports of very little rice still in the hands of producers, it would seem likely that cash prices will continue to need to show improvement to entice those remaining levels of rice to come to market. So, regardless of the choppy nature of futures prices, it would seem that the short-term trend for cash prices would be pointing up.
The longer term outlook for prices also continues to point to strengthening prices. How much price improvement experienced is likely going to be a function of the size of the 2013 crop. While early projections called for smaller acres in 2013, the recent improvement in cash prices and the generally favorable planting conditions that are currently being experienced have some suggesting that producers may be enticed to plant more acres than originally planned. This was the case in 2012 when rice acres were expected to be down fairly significantly and ended up being essentially unchanged from the previous year.
Given the uncertainty about the potential size of the 2013 crop, price projections for the 2013/14 marketing year are placed in a range from $14 to $17 per cwt ($22.68 to $27.54 per barrel). While the positives of the current supply and demand projections would suggest prices in the upper end of this range, a significant increase in domestic rice production in 2013 could place significant downward pressure on prices.
While more optimism about demand for the 2013/14 marketing year would be expected to limit some of this downward pressure, a large increase in supplies resulting from a larger-than-expected 2013 crop could push prices back in the range experienced for much of 2012.
Soybean Market Situation & Outlook
Stronger-than-expected demand through the first half of the marketing year along with drought-impacted production in 2012 has left domestic stocks for soybeans at historically tight levels. Despite historically strong soybean prices, soybean demand has been robust to this point in the 2012/13 marketing year.
Strong crush margins have helped to fuel domestic crush use, and strong world demand has helped push soybean exports to over 24 percent higher than the previous year.
While demand is expected to weaken over the next few months as the large South American crop continues to be harvested, late-season weather issues for Argentina and reports of severe shipping delays that are being experienced in Brazil could help keep U.S. exports competitive in the world market for a little longer than was originally anticipated.
Influence Of 2013 Crop Size
With the tight domestic stock situation facing this market, prices should be supported at or around current levels until there is more certainty regarding the size of the 2013 crop. Currently, projections call for a 500,000 to one million acre increase in soybean acres in 2013. While an increase, acres are not expected to rise substantially in 2013 and should help keep supplies at manageable levels.
This is particularly true if you consider that there are still some significant concerns about dry conditions in many areas of the Midwest and the potential for below-average yields again in 2013. As a result, there should be sufficient risk premium in this market to keep prices at very attractive levels until the early summer. Beyond that time, prices will likely be influenced by the development of the 2013 crop.
If yield concerns still exist at that time, prices could rival the levels experienced during the summer of 2012. A return to average or above-average yields in 2013 would be expected to put some pressure on prices, but demand prospects seem strong enough that downside risk should be limited to the mid-to-lower $11-per-bushel range for the 2013/14 marketing year.
Dr. Kurt Guidry is a Professor in the Department of Agricultural Economics & Agribusiness, LSU AgCenter. Contact Guidry at KMGuidry@agcenter.lsu.edu.