The United Nation's Food and Agriculture Organization's index of 55 food commodities climbed an additional 3.4% in January, to record its seventh straight increase. Consumers across the globe are feeling the effects of higher costs as almost every major Ag-commodity has seen its price rise in the wake of bad weather and shortages. Funds like the iPath DJ-UBS Sugar ETN (NYSE:SGG) have seen their share prices explode in 2010 as demand have outstripped supplies. With everything from corn to cotton reaching new record highs, finding "values" in the agriculture space can be difficult. However, one grain has managed to miss the current swell of increasing prices and represents an opening.
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A World Staple
With less than 8% of production entering global trade, rice doesn't necessarily leap out as a major portfolio play. Yet, more than 550 million tons of rice is produced annually around the globe and the grain is still a major food source for much of the world. When rice prices hit their peak in 2008, the World Bank estimates that the price surges plunged 100 million people into poverty. And just like the rest of the Ag-complex, from an investment point of view, the long term fundamentals for rice are just as rosy. Worldwide rice production needs to rise about 1.5% annually to keep up with demand, even as available land for farming shrinks due to urbanization.
In the near to medium term, demand is most likely to outstrip supplies. Around the globe, various rice exporting countries are predicting lower crop yields for much of 2011. Political tensions aside, Egypt's rice harvest is down 30% from 2010 and supplies from Indonesia are also facing similar problems. The Indian government has extended a ban on all non-Basmati rice exports in order to fight domestic inflation rates. As soybeans, cotton and other crops have seen their prices rise, analysts are estimating that growers in the United States will slash acreage devoted to long-grain rice as much as a 30% as farmers switch to other money making produce. Finally, Thailand, the world's largest exporter of rice, is seeing its output drop by as much as 5.3% as the worst floods in five decades have devastated crops.
According to The World Agricultural Outlook Board, rough rice prices are estimated to average between $13.90 to $14.40 per bushel, or about 11.5% higher than current levels.
Putting Some Uncle Ben in Your Portfolio
While there are a multitude of ETFs that track various agriculture futures and prices, rice isn't so lucky to have a pure vehicle yet. Even broad-based funds like the PowerShares DB Agriculture (NYSE:DBA) omit exposure. Investors wanting to add the grain to a portfolio have to do some digging until one is made.
The ELEMENTS Rogers Commodity Agriculture ETN (NYSE:RJA) is the only broad-based vehicle that provides exposure to rice. The fund offers investors a 2.15% exposure to the grain as well as some other commodities ignored by the other major Ag ETF/ETNs like rapeseed and adzuki beans. The fund charges 0.75% in expenses and has been quite successful in capturing the upside in the ag-complex.
Honing in on Rice
Just as the Chilean economy can be used as a copper play, both the economies of Thailand and Vietnam are highly levered to rice production and exports. Thai prices serve as the Asian benchmark for rice and Vietnam is opening its rice market to foreign investors as part of its commitment to the WTO. Both the iShares MSCI Thailand Index (NYSE:THD) and Market Vectors Vietnam ETF (NYSE:VNM) offer ways to play these nations.
Finally, as a domestic play Bunge (NYSE:BG) is one of the country's largest rice millers and has recently made moves to expand its business in that area by purchasing Pacific International Rice Mills (PIRMI) from Anheuser-Busch InBev (NYSE: BUD).
As agriculture and food prices continue their skyward climb, one commodity remains a value compared to the others. Long term demand for rice as both a staple and livestock feed is growing, outstripping supplies. Investors wanting to add exposure to the forgotten grain can do so with the any of the previous ETFs or through investment in Bunge. (For related reading, also take a look at Diversifying With Commodity ETFs.)
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