Rice Outlook: Focusing on India, China and Chicago Markets, Milo Hamilton, 07.19.18

>>BOBBY COATS: I am Bobby Coats, a professor
in the Department of agricultural economics and Agribusiness in the University of Arkansas
Systems Division of agriculture. Now Milo Hamilton, president, founder, Senior
Economist of Firstgrain from his headquarters in Austin, Texas, joins us to discuss rice
outlook and three rice markets you should care about, India, Chicago, and China. For three decades, Milo Hamilton has covered
the world of rice for his customers. For 18 years, he bought rice for Uncle Ben’s,
a Mars incorporated company. For the last 14 years, his company, Firstgrain,
has advised sophisticated rice firms and rice farmers on the rice market. I give you Milo Hamilton, president, founder,
senior economist of Firstgrain on “Rice Outlook and Three Rice Markets You Should Care About:
India, China and Chicago”. Milo, we look forward to your presentation.>>MILO HAMILTON: This is a very untalkative
Milo from Austin, Texas. I appreciate y’all showing up and hearing
nothing from me. And maybe that’s all for the good, but I don’t
think so. Hopefully some of you will listen and learn
something today. I certainly will. Without further ado I’d like to go into it
and get started, okay? I’m going to start with the first slide. And the slide basically tells what we’re going
to talk about. We’re not going to talk about all the markets. We’re going to talk about Chicago which relates
to north Arkansas prices, India, and China. And they are almost half the market. If you don’t understand these markets, you’re
going to get a bit lost in trying to understand what’s coming upon us in the next 12 months
to five years. I just very simply want to talk about China
and India and how it impacts Arkansas and the rest of the world. Long-term market outlook for rice, for wheat,
and how the two interact together. That’s very important for what I’m going to
tell you today. Rice is not independent of wheat. They’re like sister grains. Their fraternal twins, not twins in the identical
sense. Why watch and use U.S. rice futures, I hope
to brush on that lightly. And then some key takeaways and factors for
why prices may go higher instead of lower. Things have been going lower for a number
of years in many ways. If you look at the overall ag sector, that’s
the green line, it’s been going down in price. That’s everything from coco to corn to sugar
to cotton. And they’ve been going down and causing misery
for producers around the world. Whereas industrial commodities like crude
oil have been moving up. It’s a proverbial input/output squeeze that’s
going on right now. Could we be at the bottom of this thing? Some of the pessimists say we’re just beginning
a period of extreme unprofitability to agriculture, we’re seeing it many different ways. However, if you go to Wall Street and look
back on the market, the think it’s a buy now, Goldman Sachs put out a buy on commodities. I tend to lean in the buy rather than the
sell direction. And it were near a major, major bottom in
commodities. And that we may see a low in food grains rice
and wheat by October of 2018. I hope to make a case for that. But then immediately, the people that are
really good on stuff in the world, they say China has more rice than it knows what to
do with, more cotton than it knows what to do with, more corn than it knows what to do
with and more wheat than it knows what to do with. I’m for sure am not knowing why their stocks
are so high, but they are. You look at a free market economy like the
US, people are owning none of those commodities. Why? Because they’re cheap. I just showed you how cheap agricultural commodities
are. If China is stockpiling, which is still a
question mark, they’re doing it for some strategic reason. And it may be that they’re concerned about
climate change. Or maybe they’re concerned about trade. I don’t know. It’s a military secret, rice stocks are a
military secret. But if they’re this high, that doesn’t necessarily
mean they’ll unload it on the world. Four questions that you really need to answer
if you’re going to look at the global situation beyond Arkansas. And the first one is can India feed itself? Of course it can. No problem. In fact, it’s exporting rice now. Can India continue to export its rice pace
that it has now? Probably not. I hope to make a point to suggest that maybe
that exports will go down or stay the same. Will China rice imports increase? Everybody I’ve talked to everywhere says that
in five years China will be importing more rice than it is now. Will the U.S. continue to export rice? Yes. So the situation looks glum, but it’s maybe
not as glum as it would appear to you on your farm. Here’s a very complicated chart that I’ve
been watching for years. And every now and then what the wheat price
does can have an impact on the rice price. And when the wheat price is not going down,
but going up, the rice price has a chance to also go up. There is some substitution effect. It’s not quite clear how that works. The amber line is the price of rice. The red line is the five-year average — I
mean, the price of wheat, the amber line is. The red line is the five-year average of wheat. And down at the bottom is an oscillator that
I watch every five to ten years so I do, do this kind of work too. The last time it crossed was in February of
2002. We’re coming up on a potential crossover in
this average. And generally speaking, back over the last
50 or hundred years, when this average crosses over, wheat prices get jumpy. There’s some fundamental value in seeing higher
wheat prices because of problems with the crops out there in Russia, the Black Sea,
Europe, Australia, and places like that. And when that crosses, probably by October,
I may get a little more bullish than I am now. But I believe in the next year, rice prices
will go higher. They will at least go up to the previous highs
and probably go higher. One of the reasons is fundamentally we’re
running out of exporter stocks. Six years they’ve gone down. The last time this happened was back in 2006-2007. And that was when the price went up okay. So we’re sort of forecasting prices headed
up. We think India’s prices will go higher because
of supports. I’ll get back into India later. But they cause a problem for rice more than
China does as an importer okay. China is basically increasing its groundwater
use like no other country is. Increasing its rice production, sugar, wheat
production, increasing its exports okay. The — this is a political issue, it’s not
a monetary issue. And they are going to eventually have to do
things about water. I’ll come back to India and water in a little
while. The way I describe rice, is that it is the
currency of water security, not the currency of food security. Food — water security comes through managing
your rice which takes up to 70% of the irrigated water in China. What Asia has to do, big rice producer and
consumer, is manage its — its rice better. And that really means putting regulatory restraints
on the growing of rice. Up until this year, there was none of that. Now there’s restraints. I use the California term regulatory drought. California’s having a problem not with water
and snowfall in the Sierras. It’s got regulatory drought that’s being managed
from Sacramento and its impinging upon the ability to grow rice out there. Same is happening in Texas with the lakes
up here in Austin and the rice industry down there. I’m going to show you three slides, a little
bit detailed, but it takes you through the scenario for why India rice exports could
continue to grow and pressure the market. The next slide is why India exports could
be the same or go down. And the next slide is what do I mean by regulatory
drought. You’ve got to understand that term if you’re
going to see where things are headed in rice. 15% of India’s economy is agriculture, but
somewhat less than 50% of the voters are farmers. They demand a voice, and the politicians listen. The moody government wants to double farm
income by 2022. The rice support price has been raised by
13% for the new crop, which means their price will be higher. People are wringing their hands in India about
being able to sell the rice, and China is lowering its price. And actually, if you look at the Chinese paddy
price which we watch continually, it’s going way down because of the valuation of the Yuan
because of trade wars going on. So the price in China it was high is coming
down more towards the market. Government in India wants to pay its farmers
100% of the input cost. There isn’t a farmer in Arkansas that wouldn’t
like to be paid 150% of input cost. Can they do it? Not so sure. Of all the supports, government can really
only buy wheat, rice, and sugar which encourage their production over other crops that also
have supports. In order to maintain a price support, the
government has to intervene and buy the commodity. Then they export that, particularly in the
case of rice, and now sugar. So, it’s a very confusing game, and I hope
to sort it out with these slides. Farm prices are very low in India versus other
countries, and that allows them to export because it’s cheap. Food is subsidized as well in India, and yet
farmers are dirt poor and deep debt and rioting and protesting the government. My question is when will India let farming
become a business? I don’t know. But it’s causing a lot of problems for a lot
of commodities around the world the way the India government is managing things. Not very well. Why India rice exports outside Asia could
stop growing? Well one reason is that farmers want more
water to grow more stuff, but this conflicts with urban use of water. For the first time in India, that’s becoming
a point of conflict. A study just came out on the 17th of June,
180 — 180-page report that basically says 21 cities inside of India to include New Delhi
are forecasted to run out of groundwater by 2020. Yes, that’s 2020. That’s not less water. Run out of groundwater. And this is a very controversial report that
just came out and is going to shake things up a bit. The Punjab, a major rice growing area, water
table dropping at least a meter a year now. Farm size over time, the last four decades
is down 60%. The smaller the farm size, the higher the
cost, the less they can control the ability of the farmer to make a profit. India has 28% less water per capita than China,
one-twenty eighth of the water per capita of Brazil and one eighth of the USA, and yet
it competes in the world market with both Brazil and U.S. rice. Go figure. Now here’s one immediate thing. If China actually buys a lot of rice from
India, then that’s less rice for India to export outside of Asia. They will continue to buy from Southeast Asia. They call that new China. That’s part of their backyard where they buy
rice. They probably buy more than 5.5 maybe 6 to
7 million tons based on illegal or cross-border trade. In — China’s importing a lot more rice than
it lets on. No one knows for sure how much. But if China approves India, they could be
doing a million metric tons easy into China. And I think we’re at the edge of that happening. Water runs downhill. Farmer in Palestine, Arkansas, taught me that
as part of aggregation water runs downhill. That’s the good part of rice growing, the
bad part is dams on the rivers they move Asia from food security concern to weather security
and regulatory drought as their top priority. Need to understand these terms. Regulatory drought, not weather, not global
warming, global cooling, cuts rice production. And it is being done by the government to
maintain water security. I can give you three examples in the heart
of the ancient grain belt that’s in the Old Testament. And that is Egypt is cutting rice up but due
to a new dam on the Nile upriver. Or Egyptian rice imports ahead. They’re going to become a major importer once
they were an exporter. That’s Egypt, the cradle of civilization. Iran is reducing rice acreage due to regional
problems with water and more imports ahead for them. They are already big importers. Iraq is banning the production of rice altogether
as turkey dams up its rivers its neighbors damming up its rivers and the dams are causing
problems. More rice imports ahead from them. In Asia, Pakistan, a big rice exporter, is
facing dire water problems, but is really not facing them. They’re there. And India dams on the Indus River which is
very important to the survival of the Pakistani agricultural sector. Nothing’s been done yet. Nothing happening. India, its next door neighbor, is a big exporter. A big one. Three times the size of Pakistan. Twice, anyway. Faces dire water problems due to sinking aquifers
and dams that China has on their rivers. Water runs downhill. And that’s the problem for rice production. Is that your neighbors can dam that water
up and cause you a problem. Up until 2018, nobody had any — believed
that anybody was going to do anything. Now, this is very interesting because if — if
the concern of Iraq, Iran and Egypt should filter over to Pakistan or India, you got
a whole new ball game of regulatory drought. If you don’t believe there is regulatory drought,
go out to California and those folks will tell you yes there is. It’s a big problem. Currently the Americas are not a big player
in the world rice market. They’re a big player in soybeans. That’s the green line going straight up, mostly
to China. Even corn out of that area is increasing. And wheat is — is not increasing, but it’s
a 40 million metric ton export market out of the Americas. I look at the Americas as a single entity,
not north versus south, which is the way a lot of people look at it. And I’m asking the question are exports of
that particular grain increasing? A healthy market is soybeans, corn, a not
so healthy market is rice. The markets spiked up in 2010, and the Americas
exported outside of their area almost 3 million metric tons and then it went away. What happened? Why is the red arrow going down? Because India came back in as a major exporter
and crushed the opportunities outside the Americas. India is actually the key and the swing agent. Now, I’m going to show you a chart that seems
impossible. But it’s one that I see a feasible way to
get to it. That is if India exports less rice outside
of Asia — in other words, sends more of its rice to China or starts to actually cut back
on rice production because of drought, problems with their major cities — the rice ball game
changes drastically. It can flip down or it can flip up the Americas
market. If we export another 2 to 4 million metric
tons out of the Americas, everybody’s friends. There’s too much time being spent exporting
the rice. The only place you can get rice is in Southeast
Asia, India and Pakistan or the Americas. And right now, the price is too cheap. The reason why we’re facing cutbacks in South
America this coming year, is because they’ve had five years of unprofitable rice production
and they’re not going to remain with it, they’ll go to pasturing or something else. They have made no money for the last five
years in the rice market down there. There’s zero stocks down in Brazil, and — and
we’re at 25-year lows. We’re at the lowest stocks level in Brazil
since 1983. So the long and short of it is, I think we’ve
got a bull market on our hands of some size in the food grains. And start out by this fall on the low side. And it’s already more volatile than the last
time I advised people that were entering a bull market and that was in 2006 and I just
happened to be right on that when the price went up. In this particular case, we’ve got a wider
range, so it’s a lot more unstable. The recent activity is not just some people
doing some things. It reflects the growing volatility. We’re going to have more and more volatility
in everything because we have climate change and we have trade change going on every week
where the trade issues are more variable than the weather issues. Get used to it. So what happens? The question is: When do you get out of shorts
and get into a long position in rice? I have told my customers to at least hedge
— hedge 30% in this rally and ride it on down. And then go long, the futures are options
when we think the lowest debate. When back in 2015, we had a very big cut in
acreage and the price went up. We had a very large increase in 2016 and the
price went down and stayed there. All the way to 2017 when the acreage was cut
back. Once it was cut back and known on the market,
it went up. Okay? And then this year, the market is shown that
the acreage is up, but we don’t have any rice. So you can’t compare the statistics of carryover
of 20.4 here and 22.7 there because you had rice. This year, we don’t have any rice anywhere
at all. It’s all been called for. So we come in — you can’t get much below
this level because of pipeline. But the actual viable stocks are so low that
a thousand plus receipts have been chewed up. And we had another 129 were canceled yesterday. So, we’re going to be down to zero receipts
going to harvest. That’s why the things are going to get lively. You may have more opportunities to forward
price your rice in Chicago. Chicago is your market if you live in Arkansas
or along the Gulf coast. It’s of no value to you if you grow rice in
California, grow medium grain rice. Okay? So trying to move ahead and bring this thing
to a rapid conclusion, because you guys are busy, I know everybody’s busy doing stuff. Chicago rice futures are not for everyone,
but can work for everyone. You don’t have to use the futures to benefit
from the futures. From the regional basis that we watch, from
the movement in the markets, the relationships to the statistical position of the market,
and so before you say I don’t want futures, you can say I really need to want to watch
futures. So start out watching them, maybe actually
get involved. That’s what our company does. It urges people to get involved. More regulators okay — this is back to why
prices don’t have to be lower and stay there for another year. More regulators to force farmers to grow less
rice for water security reasons, at least in the three countries I mentioned. They’re all doing it at the same time. Countries are like people. If one or two start doing it, more pick up
on it. So we got to watch Pakistan and India to see
if they get the regulatory drought bug. But for sure, Texas and California are in
a state of diciness, shall we say, in terms of regulations. There are things floating around with the
LCRA and in Austin where I live that would suggest interruptible water is going to cost
more which affects second crop in Texas and the profitability of farmers there. Stocks in the hands of major exporters at
a historic low. The last time they were this low was in 2016,
2006-2007. And the price — you know what the price did. India price will rise this year if for no
other reasons because of the fact that they are raising the support price on rice. Here’s a little bit of problem with the monsoon
as well. Particularly up below the Ganges basin where
the rains have not been all that sporty and other areas in central India have some problems
as well. We will know more within 30 days on the –inaudible
crop down there. Brazil stocks are at the lowest in 20 years. The government –inaudible been pouring rice
into the market to keep the price down. The price is now forecasted to go up by the
end of 2018. You can’t keep a market down if you run out
of stocks and that’s what happened. We don’t have any stocks down there. Our biggest competitor is Brazil and its neighbors. And they’ve blown out a lot of rice. As we get into harvest here, we aren’t going
to see the same headaches that we had for South America a year ago or two years ago. And the — the other thing is to watch India
or watch Pakistan, watch the Far East to see if India and China start dancing together. I’ve got a minority view as an economist that
if India and China start doing stuff together, then maybe they’ll do stuff for the U.S. Because China has a cracked eye at both India
and the U.S. because they’re super powers, they’re not just another exporting country
and they have to watch very carefully how they proceed. I would just say that probably the ruckus
caused by the Trump administration, this is my little thinking, has probably got other
countries thinking about bilateral relationships. And it may loosen up and create alliances
that weren’t there before. Not that India and China are alliance, but
they have a nice reason and to work together. And by the way, India’s starting to work more
with the U.S. because they see them as also facing huge trade deficits with China which
could partly be solved by more agricultural exports. What’s being talked now in the press may not
be where the market is at down the road. Climate change up or down, if you’re polar
bear or a global warming person, we’re getting into more climate change. We have the Sierra desert over Austin right
now. And it’s causing various kinds of allergy
problems. You imagine the Sahara desert in Africa blowing
across the United States. It’s very unusual. You’ve got volcanos picking up in the Far
East and Indonesia and of course in Hawaii and in Central America. A little bit more volcanic activity. That could force buyers to restock rice. If the trade’s uncertain, if the climate’s
uncertain, they’ll stop being hand-to-mouth, which they are now, and they may do the China
thing. If everybody bought rice like China, the world
price would be twice what it is now. Or if India stopped exporting outside of their
hemisphere. Wheat prices will telegraph the change of
trend in rice. Be patient and sell slowly in 2018. All — all bull markets in rice with one exception
that started in wheat, not in rice, and that was in 20 — 1993 when the crop failed in
Japan. I’ve asked my meteorologists whether these
massive floods that killed all these people have an impact on the rice crop and they say
not so. But the weather is very variable right now. And if you think you can go to sleep and sell
your rice, you’re mistaken. And the volatility is the friend of the alert
farmer that may not use futures, but futures can work for him. So don’t go to sleep in this market. Because you’ve got a short situation in Brazil. You’ve got various things changing, and you
need to be on top of the news and have someone that can help you out. I of course — our company’s more than willing
to talk with you. We’re at Firstgrain.com. That’s my cell phone number. And I can get into more detail on strategy. Because, to know where the price is headed,
you still need to know tactically how you do it and have someone to help you do it. It’s like working out, you can lose weight
if you work out, but you don’t go up to the gym. We help you go to the gym, and help you work
out, and do a better job in your marketing. Thank you for your time.

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