Concerns Abound In South As Rice Planting Decisions Approach

By Peter Storey

S&P Global

As the end of 2021 quickly approaches, the US South's rice market will start the new year with various concerns on the horizon.

The most talked about and the most immediately pressing is the recent hike in fertilizer prices. Fertilizer costs have hit all-time time highs in recent months, with it widely believed this will limit planting. In addition to the reduced area, sources typically anticipate that farmers who can, will switch their fields to crops that are less dependent upon fertilizers, such as soybeans, or crops with more favorable financial returns, such as corn.
One exporter said that to avoid this, the CBOT Rough Rice futures September contract needs to rally substantially to encourage new crop planting, with corn and other competing crops coming off. The source said that with farmers not due to finalize planting decisions until March, there was time for this to happen.

However, a major mill pointed out that farmers would need to apply for financing in early January and provide banks with a reasonably detailed list of what they expect to grow. As a result, the true deadline

for a turnaround in the US agricultural commodities markets is actually much shorter -- potentially only a few weeks from now.

The exact scale of the decrease in the planted area is still a matter of conjecture, with some optimistically expecting a similar size to this year, which was down by almost 20% from 2020. However, the consensus is that a further major drop could happen, with one major mill speculating it could be a similar sized decrease to last year -- certainly in Arkansas.

If any drop is recorded at all, though, it would be historic. Sources have repeatedly mentioned that back-to-back production decreases in the South happen extremely rarely. It is typically agreed that it will be the first time in 10 years for this to happen, with some saying it may be closer to 20 years.

A potentially much more pressing issue is the ongoing unrest in Haiti. The country, which is the South's largest milled rice export market, has been in a state of turmoil for most of 2021. This notably intensified in July with the assassination of the country's president, Jovenel Moïse.

Ships laden with US rice were briefly forced to circle around the country as they were unable to dock in Port-au-Prince amid security concerns at the time. While this period passed relatively swiftly, gang violence remains a major concern and a potential impediment to successfully executing rice contracts.

One major miller said the situation in general "scares the hell out of me." The source elaborated that if the Haitian market becomes a no-go zone, exportable supplies of long grain rice will pile up and mills may be forced to slash their export prices if the domestic market cannot absorb the excess.

The consensus is that circumstances in the country will get worse before they get better. Various sources speculated that a revolution or armed intervention (or both) may be necessary for the situation to be resolved and for security to eventually return to the Caribbean nation. Until security returns, though, the country is likely to be a major concern for the industry.

Another major export market for the US South, Iraq, has also been the subject of recent conjecture. Since the country's government relinquished responsibility of rice procurement to a non-government entity, Al-Owais, in mid-2021, the situation for US rice entering Iraq has been in flux.

While the US and Iraqi governments did have a memorandum of understanding for Iraq to purchase US rice, this lapsed with the transfer of responsibility. Following political pressure, an almost identical MOU was signed between Al-Owais and USA Rice, an industry lobby group, for an annual volume of 200,000 mt.

Despite financing concerns, around 120,000 mt of US rice was booked via ADM and Supreme Rice in July, with the cargo recently starting to arrive in Iraq. As a result, approximately 80,000 mt is left to be ordered by the end of June for the MOU quota to be fulfilled.

USA Rice is quietly confident that Al-Owais will look to book the remaining volume in early 2022, hoping to make a success of the first year that the MOU was transferred to it. However, as the arrangement is only an MOU, there is no obligation for the Iraqi company to buy US white rice, which is currently the most expensive mainstream long grain white rice in the world.

One reason for the US industry to be concerned is the fact that Iraq -- via Al-Owais -- purchased Thai rice for the first time in seven years. Not once, but five times, with the total volume sold in recent months coming to 220,000 mt. Standard Thai 5% broken white rice is assessed by S&P Global Platts on an FOB basis at an approximate $180/mt discount to standard US #2, 4% broken white rice.

According to a source close to the trade, initial reactions to the quality of the Thai rice have been positive in Iraq. If so, Al-Owais will likely question why they would pay such a substantial premium for US rice. If Iraq does return to the US market in 2022, the source said this may only occur once new crop arrives on to the market in the South and prices weaken.

Considering the uncertainty of Iraq coming back to the market and the situation in Haiti, one miller who has scaled back exposure to the export market said that relying on these countries for demand was "no way to run a business."

Despite all of the uncertainty in the Southern market at the moment, there are positives. Mills report incredibly strong domestic demand as buyers restock following months of subdued buying interest, largely caused by pandemic-related lockdown restrictions.

One major mill reported issues with domestic rail freight, including a shortage of boxcars. However, many buyers are willing to pay around double the transportation costs to have cargo delivered via trucks.

The mill reported that even if Iraq did return to the market in early 2022, they would only want to supply a small order as domestic demand is so strong. If the crop is dramatically reduced again in 2022, Iraq not returning to the market may end up being a good thing so marketers are able to supply their core clients.

Additionally, and despite intense pushback in recent weeks, tariffs on US rice going to Central America and the Dominican Republic will fall to zero starting from 2023 through the Dominican Republic-Central America free trade agreement. Various sources reported concerns and even thinly veiled threats from concerned Central Americans, although the US government is understood to fully support rice provisions in CAFTA-DR and will not seek to renegotiate it.

In theory, this should continue to protect the US rice industry's position in the region, which has been increasingly under threat from South American rice in recent years.

Despite these upsides, 2022 will likely be another incredibly unusual year for the US South following two years of fallout from the coronavirus. If another short crop is realized, it will place immense strain on supply lines. But, at the same time, evolving situations in both Haiti and Iraq could somewhat balance out supply and demand, even as domestic demand remains robust.