If you start trading in rough rice you are trading in one of the worlds most important food products for human beings. Rough rice or rice was first grown over 10.000 years ago when humans in China Asia started to refine grass. Rice is one of the most important nutrient for humans in Asia, the Middle East, and Latin America and is the third most grown crop in the world after corn and wheat. Today mostly two types of rough rice is grown, Japonica and Indicia. Japonica is generally grown in some bit cooler areas and gets sticky when you boil it. Indicia on the other hand is generally grown in some bit hotter areas compared to Japonica and does not get sticky when you boil it. Typical countries where Japonica are grown is the southern parts of Europe, like Spain, Italy and Portugal, and in Japan and the USA, mostly California. Indicia’s typical growing areas are the southern parts of Asia, like India, Thailand, Vietnam and southern parts of China.
China is the biggest producer of rough rice in the world with India as number two. Indonesian, Bangladesh, Vietnam and Thailand are also big producers of rough rice.
What affect supply and demand in rough rice
When you trade in rough rice or any other commodity its important to have an idea of what affect and changes the supply and demand of that specific commodity. Hence this is what you should analyze and getting good at when trading in rough rice in order to increase your probability of profitable trades.
- The quality of the harvest
- Technical improvements of farming rice
- Population growth in consuming countries
- Stock levels
- Fuel prices, growing rough rice is quite fuel consuming
- Tariffs or changed trade policies between importing and exporting counties
As you can see above there is a lot of things that can affect the demand and supply of rough rice and there for also the price. In order to trade rough rice, you should probably target the short-term impacts of the price and if you want to invest in rough rice you should possibly target more long-term impacts. Below we will exemplify these events and see how they can affect your trading in rough rice.
The quality of the harvest is always something you need to consider when you trading a soft commodity and rough rice is no exception. The quality of the harvest can be something both for the one who trades in rough rice and the one who is more long-term and invest in rough rice. Too much sun and too little water can be short-term effect due to natural variation of the weather every year and can create trading opportunities both on the long side and the short side. Global warming will affect the weather in a long-term way and can be an aspect an investor in rough rice need to consider.
Technical improvements of farming are something that is more of a long-term effect and something you need to target if you want to invest in rough rice and make up your mind to. Inventions are getting better and better all the time in the farming industry but a big technical move can change the costs of growing rice and hence change the supply and therefore the price too.
Stock levels is also something that you need to consider when you trade rough rice, when the farmers harvest their rice will it have the effect of the supply and the price as you think or can a stock level above or below “normal” levels change the supply of rice? This is an effect that is in medium time frame and something both the investor and the trader of rice need to consider.
Fuel prices the production of rice is energy consuming since you need quite a lot of machinery, both when it comes to preparation and harvesting the land but also controlling water levels on the rice fields. So, any change in oil price will change the profitability for the farmers of rice which can change their mind on what they decide to grow next year. This can be of medium to long term effect and probably something an investor in rough rice need to consider if, for an example a rise in oil price is not compensated with a technical improvement.
Tariffs and other changes in trade policies are something both an investor and a trader in rice need to consider. Rice is conusumed all over the world but not grown all over the world hence its an important good to trade. A change in tariffs is a binary event and before and after a decision the price can be volatile and create good opportunities for a person who like to trade rough rice. And a world who gets more protectionist can change the demand for rice and something you need to consider and make up your mind about when you are investing in rough rice.
Reasons you might invest in rough rice
- Bet on change in demand, both from emerging and developed markets
- Inflation hedge
- Portfolio diversification
As we have went through above rice is consumed all over the world but only produced in some areas of the world. Asia is probably the biggest consumer of rice in the world and most of the biggest emerging markets in the world are located in Asia. When the economy in emerging markets improve people tend to increase their budget on food, hence an investment in rice could be something you can profit on your thesis on the economy of emerging markets.
Commodities tend to correlate strongly with inflation, meaning that high inflation is often good for commodities and prices goes up, vice versa if the inflation is low. Hence several investors often have a position in commodities to profit from their opinion on inflation, and an investment in rough rice can be one way to play and profit from your opinion on inflation or be a good hedge against inflation.
Rough rice and other commodities has a low correlation between them and other asset classes meaning an investment in rough rice can improve your total portfolio diversification.