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Published: November 19, 2009
Gold has been grabbing all the headlines
lately as the price for the precious metal has hit record highs.
In the weeks and months to come, however, you're going to be
hearing about a far more pedestrian commodity: Rice.
The price of rice has started to climb based on reports that
both India and the Philippines are looking to import record
quantities. India lost 18% of its rice crop to drought this
year. For the first time in more than 20 years, it may have to
become a net importer of rice.
While drought plagued India, the Philippines had the opposite
problem: Too much rain. The country lost an estimated 1.3
million metric tons of rice -- at least 8% of the domestic
supply for this rice-importing nation -- in a series of strong
typhoons that hit the region during the past three months.
Along with most commodities, rice hit record prices last year,
with the futures markets hitting a peak of $25.07 per 100 pounds
in April. And, also like most commodities, the price of rice
tumbled as the global recession unfolded. But even though the
price of almost every other commodity has been rebounding,
boosted by a weaker U.S. dollar, the price of rice has been
flat-lining at $13.50.
Until recently.
In the past few weeks, India and the Philippines started to buy
rice in the world market. Rice futures have started to climb as
a result, up roughly +15% in the past three weeks.
Some analysts have argued that the price of rice could double
from here. Others argue that this year's healthier crops
produced stockpiles in Thailand and Vietnam that could help
mitigate at least part of any price increase. But one of the
biggest unknowns going into a period of potentially higher rice
prices…
... is panic.
Last year's record rice prices started a wave of civil
unrest. Rice prices also started panic-driven hoarding. Bulk
retailers like Wal-Mart's (NYSE: WMT) Sam's Club and
Costco (Nasdaq: COST) began rationing rice in an attempt to
keep it on their shelves. If the market starts to catch even a
whiff of panic in the air, the price of rice could skyrocket.
Unless you dabble in the futures market, there's no real pure
rice play for American investors. When rice hit record prices
last year, investors wondered why there was no rice-based
exchange-traded fund (ETF). More than a year later, they are
still wondering why one of the world's largest crops still lacks
an investment vehicle of its own.
Some investors are using general agriculture ETFs like
PowerShares DB Agriculture (NYSE: DBA) and iPath DJ-AIG
Agriculture Sub-Index (NYSE: JJA) as proxies for rice. But
neither of these funds has an interest in rice.
Elements/Rogers International Commodity Agriculture (NYSE: RJA)
is one of the only funds that does have rice as a holding, but
only a meager 1.43% of the portfolio. Still, it's more rice than
you'll find in any other exchange-traded product.
But I find myself thinking back to when crude oil prices were
coming off their lows.
Instead of consumers hoarding oil, we had cases of institutional
hoarding. Speculators and investment houses started buying up
oil on the cheap and storing it, hoping to sell it for a higher
price in the future. If this starts to happen with rice, a
company with grain storage capacity, like Archer Daniels
Midland (NYSE: ADM) may be the beneficiary.
ADM has rebounded +44.2% in the last year, although it's still
-33% off its April 2008 high. And with a forward P/E of roughly
11.5 and a PEG ratio less than 1.2, ADM may be a better value
bet on rising rice prices than any of the alternatives.
Amy Calistri
Editor
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