Learn How To Trade Rough Rice

rice terraces

Why is Rough Rice Valuable?

Rough rice is the whole rice grain that is harvested from the rice plant. It includes the hull, which is the hard protective covering that accounts for 20% of the grain’s size.

Also known as paddy rice, rough rice has a coarse consistency. It can be transformed into brown rice by removing the hull or white rice by removing the hull, bran layer and cereal germ.

Archaeological evidence shows that rice domestication began more than 8,000 years ago in the Yangtze Valley in China. The crop steadily proliferated to other regions, and by around 2,000 BC, the ancient peoples in the Ganges region of India were cultivating rice as a food source.

Today rice is a staple in the diets of more than half of the world’s population, especially in Latin America, Asia and the Middle East. Annual production of milled rice tops 480 million metric tons, which makes it the third most produced grain in the world after corn and wheat.

Rice is a member of the grass family (Gramineae). There are more than 10,000 species of grasses, and they grow worldwide in a variety of climates. * (Other grass crops that grow primarily as agricultural crops for humans include corn, wheat, sorghum, barley, oats and sugar cane.)

How is Rough Rice Grown?

Most cultivated rice belongs to the grass species Oryza sativa *(there is also a less common variety known as Oryza glaberrima). There are over 40,000 different varieties of Oryza sativa, but the majority of rice cultivated worldwide can be categorized into two main types: Japonica and Indica:

 JaponicaIndica
Growing ClimateTemperate Hot; tropical and subtropical
Growing RegionsPortugal, Spain, Japan, Italy and the United States (California)Southern Asia, including Sri Lanka, India, Thailand, Vietnam and Southern China
Plant CharacteristicsNarrow, dark green leaves, medium-height tillers and short to intermediate plant stature.Broad to narrow, light green leaves and usually tall to intermediate plant stature. Plant is characterized by its abundant tillering.
Grain Short and round and doesn’t break easilyLong and tends to break easily
Cooked ConsistencySticky and moist Fluffy - grains don’t stick together
% of Global TradeMore than 10%More than 75%
Amylose (starch)0 - 20% 23 – 31%

The remaining 10 – 15% of the global rice trade consists of specialty varieties known as aromatic rice. Aromatic varieties of rice can be found in both the Japonica and Indica main types. Jasmine rice from Thailand and basmati rice from India and Pakistan are examples of these varieties. Aromatic rice sells at a premium in the marketplace.
Rice is cultivated in many diverse climates across the globe. As a result, four different growing methods have evolved:

  1. Irrigated: Primarily found in East Asia, irrigated farming supplies 75% of global rice production. Irrigated rice grows in paddy fields.
  2. Rain-fed Lowland: This farming method produces one crop per growing season and requires flooding of the rice fields with almost 20 inches of water. Growing regions include East India, Bangladesh, Indonesia, Philippines, and Thailand. Production is variable and inconsistent due to poor soil quality and drought and flood conditions in these regions.
  3. Upland: These farming zones are located primarily in Asia, Africa and Latin America. Upland rice fields are usually dry, and the land can be low-lying, drought-prone, rolling or steep. Upland rice plants are usually rotated or interspersed with other crops.
  4. Flood-prone: These farming zones are located mostly in South and Southeast Asia. Flood-prone zones are characterized by extreme flooding or drought conditions. As a result, yield is inconsistent and volatile. June to November is the rainy season in this region.
rice paddy irrigation via pixabay

Rice paddy irrigation via pixabay

Rice production takes place in seven steps:

  1. Preparation
  2. Planting
  3. Harvesting
  4. Drying
  5. Hulling
  6. Milling
  7. Enriching

Preparation

During this step, the soil is leveled and fields are plowed to prepare for planting. A key component of preparation is ensuring an adequate supply of water for the crop. Farmers surround fields with a water source controlled by dikes or levees. Pumps and reservoirs may be used to control the amount of water the crop receives.

Planting

Rice seeds are first soaked and then sown in flooded fields (or first in nurseries) either by machine or hand. Typical distribution is 15 to 30 seedlings per square foot.

Harvesting

Approximately three months after planting, the grains begin to ripen. The tops will droop and the stems will turn yellow. At this time, farmers drain water from the fields and begin the harvest. Sharp knives or sickles or mechanized harvester cut, thresh and stack the grains.

Drying

Machines that heat air or natural sunshine dry the grains to decrease moisture content to around 20%. Once dried, the grains are ready for processing.

Hulling

Machines or farmers clean the grains and remove the hulls.

Milling

Brown rice requires no further processing. To produce white rice, mills remove the outer bran layers and polish the remaining grain. They may coat it with glucose to increase its shine.

Enriching

During this step, the white rice grains are processed further to restore vitamins and minerals back into the finished product.

Global rice production is heavily concentrated in a small number of countries. China and India produce more than half of the annual global output, and the top five producers supply more than 70% of the global supply of rice.

 

10 Biggest Rice Producing countries

Top 10 Rice Producing Countries

RankFlagCountryRice Produced (Thousand Metric Tons)
#1Flag of ChinaChina146,000
#2Flag of IndiaIndia107,500
#3Flag of IndonesiaIndonesia37,000
#4Flag of BangladeshBangladesh33,000
#5Flag of VietnamVietnam28,450
#6Flag of ThailandThailand20,400
#7Flag of BurmaBurma10,200
#8Flag of South PhilippinesPhilippines12,900
#9Flag of BrazilBrazil7,950
#10Flag of JapanJapan7,600

Top 3 Uses of Rice

Uses Of Rough RiceDescription
Food staple
ricebowlicon
Rice is a staple food in many countries, particularly in Asia, Latin America and the Middle East.
Beverages
milkicon
Rice milk and the Japanese alcoholic beverage sake are two examples
Biofuels
strawicon
Straw from rice is increasingly being used in the production of renewable energy.  

What Drives the Price of Rough Rice?

The price of rice is most dependent on the following factors:

  1. China and India Demand
  2. Inventories
  3. Climate
  4. Trade Policies
  5. Crude Oil Prices

China and India Demand

Any discussion of rice prices inevitably centers on China and India. Although these two countries are the main producers of the commodity, they also combine to consume about half of the world’s supply of rice.

There are two possible scenarios to consider. As the population in India and China increases, their demand for food will grow. This could help boost rice prices.

However, as these countries grow wealthier, they are also likely to adopt Western dietary norms. This could mean increased consumption of meat and other Western foods such as pasta and bread. Since rice has traditionally been viewed as a cheap source of food, its consumption may decline. Investors in rice should keep careful tabs on consumption patterns in these two countries for clues about future prices.

rice sacks via pixabay

Rice sacks via pixabay

Inventories

Rice inventories can offer key information about supply surpluses and shortages.

In recent years, China has been stockpiling more rice. While other countries including India and Thailand have diminishing stockpiles, these decreases pale in comparison to the size of China’s increases.

Elevated stockpiling by the world’s largest consumer should be a troubling sign for prices. As these inventories increase, it lessens the chances for a supply shortage and increases the chance for a supply overhang on the market.

Climate

As with all agricultural commodities, climate plays a key role in determining rice supply and prices. Rice production, in particular, is highly sensitive to the availability of an ample water supply. Drought conditions in major rice-producing regions could create shortfalls in supply and lead to higher prices.

Rice traders should pay close attention to precipitation levels and temperatures in key growing regions.

Trade Policies

Policies that affect the importing and exporting of rice have a significant effect on prices.

India, for example, has placed limits or bans on rice exports in the past. Fears that these policies could resurface have the potential to create price spikes.

Crude Oil Prices

Rice production is an energy-intensive endeavor.

Large-scale production requires machinery to irrigate fields and control water levels. During the harvest, mechanized cutters cull the crop, while other machines dry the grains. Each step of the process requires energy consumption. As a result, a rise in crude oil prices can make rice more expensive.

4 Reasons You Might Invest in Rough Rice

Investors purchase agricultural commodities such as rough rice for a variety of reasons, but the following are most common:

  1. Bet on Global Demand
  2. Climate Change
  3. Inflation Hedge
  4. Portfolio Diversification
Crowds in Asia via Wikimedia

Crowds in Asia via Wikimedia

Bet on Global Demand

Demographic trends across the globe bode well for rice consumption.
Population growth in Europe and North America is stagnating, but in Africa, the Middle East and Asia, population growth is on the rise.

These regions have traditionally consumed rice as a staple in their diet. As their populations increase, their demand for affordable food sources for their citizens will increase. Rice consumption should benefit from this trend.

Climate Change

Rising global temperatures have the potential to wreak havoc on global crop outputs. As more regions experience drought conditions, the potential for food shortages increases. Rough rice prices should benefit.

drought via pixabay

Drought via pixabay

Inflation Hedge

Investing in rough rice is a way to bet on higher inflation.
The US Federal Reserve Bank and central banks around the world have kept interest rates low for a long time. These policies are likely to continue since they support consumer borrowing and spending.

Low interest rates have produced speculative bubbles in many assets classes, but not yet in agricultural commodities.
Yet food remains the most basic and fundamental necessity. Food commodity prices could see the largest increases if the economy experiences higher inflation. Rough rice prices could benefit from these conditions.

Portfolio Diversification

Most traders have the vast majority of their assets in stocks and bonds. Commodities such as rough rice provide traders with a great way to diversify and reduce the overall risk of their portfolios.

Should I Invest in Rough Rice?

Rough rice competes for demand with the other agricultural commodities such as wheat and corn.
Consumer preferences for one food staple over another often depend on price. As a result, the prices of many agricultural commodities are correlated with one another.

Therefore, traders wanting to hedge their bets might want to buy a basket of commodities that includes rough rice, other grains, livestock, metals, energy and other staples.

Investing in a basket of commodities that includes rough rice and other commodities can mitigate risk and diversify the composition of assets in a portfolio.

A basket of commodities can also provide protection against inflation and protect a trader from the volatility of movements in individual commodities.

drought in rice fields via Flickr

Drought in rice fields via Flickr

Including rough rice in this basket may make sense for the following reasons:

  1. Emerging Market Growth: Africa, Asia and the Middle East have fast-growing countries that will have enormous food needs in the years ahead. These countries have a long history of consuming rice in their diets. As their populations grow, demand for rice may follow suit.
  2. Climate Change: Global warming is a positive catalyst for rough rice prices. Lower crop yields from droughts and excessive heat could boost the price of all agricultural commodities including rough rice.
  3. Weak Dollar: A weak US currency could be beneficial to agricultural commodities including rough rice.

However, traders should also consider the risks of investing in rough rice:

  1. A global economic slowdown could reduce demand for all agricultural commodities including rough rice.
  2. A sustained drop in the price of other agricultural commodities could siphon demand away from rough rice. While usually, such price drops are temporary, there is no guarantee that this will be the case in the future.
  3. Changes in consumption preferences in India and China have the potential to depress demand for rough rice. These countries may adopt more Western dietary norms in the future. This could lead to reduced demand for rice products.

Expert Opinions on Rough Rice

One agricultural economist for the United States Department of Agriculture (USDA) believes that tightening world supplies could produce higher prices in the months and years ahead. He believes that poor weather conditions combined with diminishing global stocks could end the price slide for the commodity:

Rough Rice expert Dr Nathan Childs

“You can see prices have been dropping, dropping for a while. But now we’re beginning to see tighter supplies in this country and in some other parts of the world.”

Dr. Nathan Childs, USDA Economic Research Service

However, Dr. Childs is still cautious. He notes that the excessive inventory buildup will take time to work itself out. In the meantime, there is no shortage of rice:

“I look at the all rice ending stocks, and, as I said earlier, we came off three years of abnormally high global ending stocks with high stocks-to-use ratios of 24 percent to 25 percent. That’s too high.”

How Can I Invest in Rough Rice?

Investors have a limited number of ways to invest in rough rice:

Rice Trading Methods Compared

Method of InvestingComplexity Rating (1 = easy, 5 = hard)Storage Costs?Security Costs?Expiration Dates?Management Costs?Leverage?Regulated Exchange?
Rough Rice Futures5NNYNYY
Rough Rice Options5NNYNYY
Agricultural ETFs2NNNYNY
Agribusiness Shares2NNNNYY
Rough Rice CFDs3NNNNYY

Rough Rice Futures

The Chicago Mercantile Exchange (CME) offers a futures contract on rough rice that settles into 2,000 hundredweights, or about 91 metric tons of rough rice.
The contract trades globally on the CME Globex electronic trading platform and has expiration months of:

  1. January
  2. March
  3. May
  4. July
  5. September
  6. November

Futures are a derivative instrument through which traders make leveraged bets on commodity prices. If prices decline, traders must deposit additional margin in order to maintain their positions. At expiration, the contracts are physically settled by delivery of rough rice.

Investing in futures requires a high level of sophistication since factors such as storage costs and interest rates affect pricing.

Rough Rice Options on Futures

The CME offers an options contract on rough rice futures.
Options are also a derivative instrument that employs leverage to invest in commodities. As with futures, options have an expiration date. However, options also have a strike price, which is the price above which the option finishes in the money.

Options buyers pay a price known as a premium to purchase contracts.

An options bet succeeds only if the price of rough rice futures rises above the strike price by an amount greater than the premium paid for the contract. Therefore, options traders must be right about the size and timing of the move in rough rice futures to profit from their trades.

Rough Rice ETFs

These financial instruments trade as shares on exchanges in the same way that stocks do. There is no ETF that offers pure-play exposure to rough rice prices. The ELEMENTS Rogers International Commodity Agricultural ETN (NYSEARCA:RJA) holds many agricultural commodities, including rice, in its portfolio.

Top 2 Agricultural ETFs/ETNs by Assets Under Management

PowerShares DB Agriculture FundUBS ETRACS CMCI Agriculture Total Return ETN

ETFs such as PowerShares DB Agriculture Fund and UBS ETRACS CMCI Agriculture Total Return ETN invest generally in agricultural commodities, but do not necessarily hold rice in their portfolios.

Shares of Rough Rice Companies

There are no public companies that offer pure play exposure to rough rice price. However, traders that want exposure may want to consider buying shares in large agribusinesses that provide seeds, fertilizers and pesticides to farmers:

CompanyCurrent PriceDescriptionExchange
Monsanto
Global agricultural company that provides seeds, genomic and other products to farmers.New York
(NYSE)
The Mosaic Company
Global agricultural company that sells crop nutrients to farmers.New York
(NYSE)
Potash Corporation
Global agricultural company that sells fertilizer and feed products.New York
(NYSE)

Agricultural CFDs

A popular and easy way to invest in rough rice is through the use of a contract for difference (CFD) derivative instrument. CFDs allow traders to speculate on the price of rough rice. The value of a CFD is the difference between the price of rough rice at the time of purchase and its current price.

Some regulated brokers worldwide offer CFDs on rough rice. Customers deposit funds with the broker, which serve as margin. The advantage of CFDs is that trader can have exposure to rough rice prices without having to purchase shares, ETFs, futures or options.

Start Trading Rough Rice
Plus500 logo
One of the leading brokers for trading commodities, like rough rice, is Plus 500. Here’s why:

  • No commission on trades (other charges may apply)
  • Free demo account
  • Easy to use (mobile-friendly) platform
  • Industry-leading risk management tools
  • Trade rough rice and hundreds of other markets
  • Your funds are safe – publicly listed company regulated by the UK’s Financial Conduct Authority and Cyprus’ Securities and Exchange Commission

Start Trading at Plus500.com Important: Your capital is at risk. CFD services are suitable for experienced traders only.

Further Reading

Riceonline.com
The Rice Trader

Lawrence Pines is a Princeton University graduate with more than 25 years of experience as an equity and foreign exchange options trader for multinational banks and proprietary trading groups. Mr. Pines has traded on the NYSE, CBOE and Pacific Stock Exchange. In 2011, Mr. Pines started his own consulting firm through which he advises law firms and investment professionals on issues related to trading, and derivatives. Lawrence has served as an expert witness in a number of high profile trials in US Federal and international courts.
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