Spend Matters welcomes this guest post from David Galbicsek, of Mintec.
The price premium of U.S. rice has been hurting exports in recent years. Abundant global stocks and smaller domestic supplies caused by adverse weather have both played against the U.S.
Rice is a widely appreciated crop in the world, with as much as 40,000 varieties in cultivation, feeding almost half of humanity. It first arrived to the U.S. in South Carolina around 1685 on a ship sailing from Madagascar.
Today the U.S. is the eleventh-largest producer of rice in the world and the thirteenth largest consumer, with Brazil and Nigeria the only non-Asian countries ahead of it. It is the fifth largest exporter responsible for 8% of global exports. Production in the U.S. is concentrated in six states: Arkansas (which accounts for more than half of U.S. production), California, Louisiana, Mississippi, Missouri and Texas.
When compared with rice from Asia, American rice is often a bit pricey (see the graph) and this makes it less competitive on the global market. U.S. rice exports still reach many countries on the globe. Most of them end up in Latin America or Canada but can get as far as Turkey, Japan and Saudi Arabia.
Since domestic consumption hasn’t increased much in the last decade or so (it has fluctuated around 4.1 million tonnes since 2006/07) it seems that the only way for the industry to grow, apart from slowly growing with the population, would be through exports. Exports, however, only grow when prices are close to international ones.
When the Thai government started to release its stockpiles in 2013, prices dived deep, making U.S. prices, held level by tighter domestic stocks, uncompetitive until next year when optimistic forecasts of U.S. production led to a drop in prices. The 2014/15 season saw prices drop even further, losing their premium, as production exceeded the initial forecasts. In 2015/16 bad weather was again on to the farmers and production fell back, increasing prices and limiting export growth. Prices, however, started falling back by the end of 2015 due to low demand as consumption was 7% lower year-over-year.
Global prices rose recently due to higher demand and supply tightness in exporting countries. However, U.S. exports are forecast to increase 11% y-o-y to the highest level in a decade. Forecasts for 2016/17 show an 18% y-o-y increase in planted area in the U.S. Although prices are not high by historical standards, rice is currently preferred by farmers because its price return per hectare is better than alternative crops. The area planted is still only second largest to 2009/10 area, but if prices for alternative crops will stay low for another season or the global exportable supplies remain tight, it might even go up to a new high.