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The Top Factors that Move the Price of Rough Rice

When you come across the term rough rice, you want to cast you mind to rice as it comes from the field after harvest. Rice belongs in the list of top three staple foods of the world. Here is something to show you just how important rice is to humanity. In 2012, countries around the world dedicated 162.3 million hectares of land for rice cultivation, which resulted in a total production of 738.1 million tons of rough rice. China and India are the two largest producers of rice in the world. Here, we will be considering the top factors that affect the price of rough rice.

Owing to the huge importance of rice to countries around the world, rice inventories influences rice prices significantly. As of 2009, the world’s total rice consumption stood at 531.6 million metric tons of paddy equivalent. Inventories have to be at high levels all the time for such huge demand to be satisfied. Therefore, if at any time, inventories dip, traders begin to fear that there would be a scarcity of rice. As you would expect, a price hike would follow. On the other hand, high inventories tend to lead to lower prices.

Global demands
Just to reiterate, some of the most populous nations of the world depend rice as their major source of food. Moreover, according to information provided by FAOSTAT, between 1961 and 2002, per capita consumption of rice increased by 40 percent. And with rice now being employed in some other industries, like the biofuel sector, global demand for rice would continue to rise. In every increase population of the world, also suggest that rice consumption would keep rising. Therefore, whenever news about increasing demand comes out, there would usually be an initial market reaction, which is usually to send prices higher. However, if for any reason, a reduction in the consumption of rice is expected, the market will react by sending prices lower.

Demand in China and India.
While these two countries are the highest producers of rice, they are as well the highest consumers of rice. Of the 531.6 million metric tons that was consumed in 2009, China consumed 156.3 million metric tons of paddy equivalent, or 29.4 percent of the world’s consumption, while India consumed 123.5 million metric tons of paddy equivalent, or 23.3 of the world’s consumption. This goes to show you just how consumption information in these countries is to the rice market.

In general, increasing consumption in these countries often drive rice prices upward, while weak demand outlooks from these countries often weaken the rice market as well.

Climate changes
Rice is a highly climate specific agricultural produce. To be specific, rice cultivation has intense water requirement. This means that unfavorable weather conditions would put pressures on supplies and hence, send prices higher. For instance, in late 2007 to about May 2008, the price of rice rose significantly, owing to droughts in major rice producing countries, as shown by the chart below. Australia was particularly on the forefront.


Therefore, investors should particularly watch out for drought outlooks. Some countries, notably Brazil, have intense drought seasons. How severe is it going to be? How long would it be around? These questions would help you figure how to profit from weather outlooks.

Fuel and fertilizer costs
Rice cultivation also require considerable amount of soil fertilization in order to maximize farm production. This means that means that the cost of fertilizers is a key factor in the pricing of rice.  High fertilizer prices would increase the cost of production, which in the end forces rice prices to go up. For instance, according to Investopedia, rice prices from 2004 to 2008 were affected by rising fuel and fertilizer expenses, leading to a doubling of price in just four years.

Some top producing nations have placed export ban on rice in the past. India has done it in the past, and it led to higher rice prices. The decision by governments to ban the export of rice could be borne out of fear that there would be a shortage of rice in the world market. So countries make such move to ensure that they have enough in case there is a scarcity. 

US export data
While US accounts for less than two percent of the world’s rice production, it surprisingly account for almost 12% of the world’s export. In general, when US export more rice, rough rice futures tend to go up, owing to fears that the US might be working itself toward a scarcity. In recent times, this has been the biggest mover of short-term rough rice prices.

Demand in the biofuel sector
In recent years, the use of rice in the bio-fuel sector has been on the rice. Apart from the drought, which was the major factor for the price hike In 2007/2009, analysts also said US subsidies on rice of bio-fuel production contributed to the price hike. With the growing awareness about global warming, the demand for rice form this sector could go even higher, which would end up driving prices high to come extent. Therefore, investors should keep tabs on trends in the biofuel sector.

On a last note, investors should also keep tabs on trends in the beer industry. In recent years, the US has increased the amount of rice that goes into this industry for beer production. As a matter of fact, beer production is a big part of the sharp increase in the consumption of rice in the last two and half decades.

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