July 25, 2012

BILL KIERNAN Director, GAI Research & Insight

The story of the worst drought in the United States since 1956 and its impact on the corn and soybean crop has been dominating the news.  This coverage of the U.S. drought has however, overshadowed Mother Nature’s mischief elsewhere in the world.  Drought in Europe is also reducing the grain crops there, where yields are forecast to slide 12% from last year, while the Black Sea wheat crop is projected to be down by 25%.  Global grain and cereal futures are at record highs.  Though the weather outlook is still bleak, some analysts are predicting that these markets may be close to topping out.  This leaves me to ask “Is the next commodity bull run about to be caused by the weakest monsoon so far in India in three years?”

In India, the yearly monsoon that was forecast to hit the coast of southern Kerala on June 1^sthasn’t appeared. Rainfall is estimated to have been anywhere between 22%-31% below average at the time of this writing.  Indian officials are making optimistic announcements that there is still ample time for the monsoon season to turn around, but farmers are dubious. 

In a country where over 50% of crops are rain fed, the monsoon accounts for 70% of India’s total rainfall.  As such, to avoid the loss of a crop, farmers are planting drought resistant soybeans and pulses instead of water intensive rice; resulting in rice plantings being down by 20.3%.  Rice is a staple food for virtually half the world and some experts believe that if conditions continue, a tipping point for the rice market may be reached, and prices will be off to the races.

All eyes have been on the headlines about the drought in the U.S. and sky-high corn and soybean prices, but all the while there is mounting evidence that rice will be headed in the same direction. So far even in light of this evidence, the market hasn’t reacted, which could make for a very lucrative opportunity for commodity traders. Rice for September delivery rose only 1% to $15.65 per hundredweight on the Chicago Board of Trade in Mumbai.  The central government of India has stated that it is looking into fixing market prices, changing export regulations and distributing surplus grain from warehouses, but many believe these measures will have little effect, leaving the market even more vulnerable to reduced planting and weather conditions.  We will keep our eyes on this situation for you.

Click here to watch a news video from India about the dry weather conditions and the movements in the rice market.