Rice Prices May Double by 2008 Hurting Kellogg, Busch
Aug. 14 (Bloomberg) -- The world may soon pay more than ever for its most abundant food: rice.
A record crop this year in a market anticipating rising production costs will do little to slow the rally for the staple of 3 billion people. As China, the No. 1 consumer, and Vietnam, among the biggest exporters, continue to plow under their paddies, rice will double within two years to almost $20 per 100 pounds from $9.90 now, according to Stephan Wrobel, chief executive officer at Diapason Commodities Management SA in Lausanne, Switzerland, which oversees $5.5 billion.
Mother Earth Investments, a Liechtenstein-based fund whose rice holding rose a percentage point to 4 percent during the past 12 months, gained 23 percent this year, almost triple the Goldman Sachs Commodity Index. ``Fields in China are now being turned into land to build'' apartments, factories and roads, said Roland Jansen, the Mother Earth manager.
The prospect of reduced production threatens to spur inflation in rice-importing nations from the Philippines to Nigeria, while driving up costs for manufacturers including Anheuser-Busch Cos., the U.S.'s biggest buyer of the grain, and cereal makers such as Kellogg Co. Rice inventories worldwide are already near a 26-year low and will drop further, according to the U.S. Department of Agriculture in Washington.
The quantity of unsold rice this year will be barely half the level of 2000's surplus, reducing the buffer against a crop failure, the department forecasts. Fertilizer and irrigation costs are rising with energy prices, and farmers are turning to cheaper-to-grow grains, fruits and vegetables.
Price Rally
``You have more and more people in the world and yields are not rising as quickly as the increase in population,'' said Mamadou Ciss, 45, managing director at Ascot Commodities NV in Geneva, which traded 1.3 million tons in 2005, or almost 5 percent of the international market. ``World stocks are very, very tight.'' Ciss expects prices to double in three years.
Rice may be the second-best agricultural investment, behind only the ethanol-powered corn market, according to Julius Baer Holding AG, Switzerland's largest independent money manager.
Rice for November delivery last week gained 4.8 percent to $9.895 for each 100 pounds on the Chicago Board of Trade, the highest weekly close in more than two years. Prices have jumped 48 percent in the past year, outpacing the 19 percent increase in wheat futures and the 8.3 percent gain in corn. The record is $12.92 per 100 pounds reached in Dec. 10, 1993.
``You could see an inflationary impact'' from rising prices, Robert Subbaraman, senior economist with Lehman Brothers Holdings Inc., said by phone from Hong Kong. ``For exporters, it would be a windfall. For consumers, it would force some governments to give greater subsidies'' to the poor.
Lost Land
The world's largest exporters are Thailand, Vietnam and India. The top importers are the Philippines, Nigeria and Iraq.
Even forecasts for a record global crop this year are unlikely to damp price gains. The world's rice crop probably will increase to 634 million metric tons in 2006, the United Nations said on April 7.
China has lost 8 million hectares (19.8 million acres), or 6.6 percent, of its farm land in the past decade, according to a survey released last year by China's Ministry of Land and Resources. At the end of 2005, China had approximately 122 million hectares (301 million acres) of arable land, covering 13 percent of its territory.
``Prices will rise over the next three years,'' said Sunny Verghese, chief executive of Olam International Ltd. in Singapore, who said the company is one of the top three global rice traders. ``If there's a bad drought in any of the producing countries, we could see a fairly sharp spike.''
Feeling the Pinch
Manufacturers are feeling the pinch. Kellogg of Battle Creek, Michigan, on July 27 said cost increases for fuel, energy and commodities in the second quarter were ``unprecedented.'' Profit in the quarter rose 2.9 percent to $266.5 million after the largest U.S. cereal maker raised prices for the first time in two years. Kellogg spokesman Neal Goldner didn't return a telephone call seeking comment.
Growth in harvests will be curbed by the cost of fuel and shortage of land, said Greg Smith, managing director of Global Commodities Ltd. in Adelaide, Australia. Smith's $90 million fund, which invests in energy, metals, soft commodities and bonds, has jumped 14 percent in the past 12 months, double the 7 percent gain in the Reuters/Jefferies CRB Index.
``Even with genetically modified crops, we still require water, fertilizer and equipment to harvest the crop,'' he said.
Falling Output
In the U.S., which ranks 11th in world production, rice output is falling. Costs for irrigating rice have gained $1.75 for each 100 pounds in the past year, said Milo Hamilton, president of First Grain Advisory Services in Austin, Texas. U.S. production will fall 12 percent this year to 197.2 billion pounds from a year ago because of fewer plantings and hot weather, the government said Aug. 11.
``Farmers have cut back fertilizer and mined the soils, which will show up as lower yields,'' said Hamilton, former head buyer for 18 years at Uncle Ben's Rice, a subsidiary of Mclean, Virginia-based Mars Inc. ``Prices are too cheap to prevent acreage cuts in 2007.''
Weather Threat
Chicago futures will rise to $13 for each 100 pounds as long as crude oil prices stay above $40 a barrel and will surge to $20 for 100 pounds if crude reaches $100, he said. Oil is now about $74 a barrel.
A developing El Nino weather pattern threatens to reduce rice harvests. The last strong El Nino event in 1997 and 1998 led to record global imports by Indonesia, the third-biggest producer and consumer of rice.
The pattern is fueled by rising Pacific Ocean temperatures coupled with a drop in barometric pressure that shifts warm waters east, moving clouds and moisture to parts of China and North America and reducing rainfall in Asia, central Africa, Australia and parts of Central and South America.
``I'm more convinced that an El Nino is evolving'' into a threat for rice and other grains, from Indonesia to Brazil, said Drew Lerner, president of World Weather Inc. in Kansas City, Kansas. ``By the time the National Weather Service declares an El Nino, it will already be influencing weather.''
Conditions have turned wet in the North China Plain, pointing to a growing El Nino influence.
``You only need crops to go wrong in a few big producers for supply to get quite tight,'' said Tobin Gorey, commodity analyst at Commonwealth Bank of Australia, in Sydney Aug. 14.
China's Demand
Inventories in China have fallen for six years, with stockpiles before this year's harvest forecast to drop to the lowest since 1975, the USDA forecast in July. China hasn't revealed any plans to make large purchases in 2006 or 2007, the agency said.
Prices have surged before, when the country imported the cereal in 2004. China has since then increased incentives for farmers and production has recovered, limiting imports. The government expects to stay out of the market.
``Rice yields have improved in the past two years because of good weather and government incentives,'' said Li Ke, grain analyst at the China National Grains and Oils Information Center in Beijing. ``China, in terms of rice seed development, is world class and has technology to beat disease and pests, and drought- resistant seeds.''
