Friday, April 11, 2008

Ricing Frustrations

To think, I was actually a little tweaked that the cost of my Bran Flakes was 30 cents higher on my last shopping trip.

This link offers a number of brief videos from the BBC on the global rice shortage. According to the United Nations Food and Agriculture Organisation (FAO), 37 countries are facing a food crisis, and food riots have broken out in several African countries, Indonesia, the Philippines and Haiti.

The beauty of investing in commodities is that there are relatively few variables that need to be monitored and no company-specific factors to worry about. Price boils down to supply and demand. Currently, with many agricultural commodities we are seeing demand increase due to increasing populations, a rising middle class in parts of the the developing world, and new demand for ethanol. Supply hasn't kept pace.

When we look at the US Department of Agriculture's figures for rice, we find that this supply-demand imbalance has led to a decline in global rice stocks from a peak of 130 million tonnes in 2000-2001 to 72 million tonnes in 2007-2008, the lowest level since 1983-84. According to the same report, nearly half of the world's 6.6 billion people are dependent on rice and are already eating more than is harvested yearly. The price of rice on the Chicago Board of Trade has doubled in the past year.

In response, governments are curbing rice exports in an attempt to keep prices down and bolster local supply. To the extent that they're instituting price controls they're taking away incentive for farmers to expand planting, and the limiting of exports is leading to crises in import-dependent countries like the Philippines. Consumers are hoarding rice as well, furthering the supply crisis.

Clearly, demand has been outstripping supply (as with many commodities). The key will be to look for the inflection point. There's a huge incentive these days (where prices are not constrained) to put even marginal land back into farm service. Pests, disease, and weather are always wild-cards, but the incentive to plant is there. The question is whether this will result in a narrowing of the supply-demand gap.

The fertilizer companies continue to be well-positioned and should be a key beneficiary again this year. I continue to like this space, but I'll be watching the supply figures carefully.

In the meantime, I'll be expanding my pantry and hoarding my Bran Flakes.