By Noble Drakoln

The term rough rice is used to describe rice as it comes from the field after harvest. Whether birthed from Indian soil by Vishnu, carried to the Chinese on the tail of a dog or incarnated as the Emperor of Japan, rice is recognized as an integral part of the most populous countries in the world. Rice was first sown, harvested and distributed across Southeast Asia and Central Asia in the second millennium B.C., migrating to Europe in the eighth century A.D. and then to the Americas during the 16th and 17th centuries.

Today, rice constitutes one of the top three staple foods of the world. Consumption in both China and India translates directly into weak exports. Only a small percentage of the total global production of rice is truly available for international trade, which leaves small rice-producing countries such as Thailand, Vietnam and the U.S. in the forefront as net rice exporters.

With its invaluable status as a staple food source in two of the most populous nations on earth and the domination of its export share by relatively small producers, rough rice futures are becoming an attractive commodity for both hedgers and speculators, especially in light of geo-political and climatologic developments.

A sample commodity futures contract for rough rice is shown in the following table.

Rice Contract Specifications
Ticker Symbol Open Outcry: RR
Electronic : ZR
Contract Size 2,000 cwt (hundred weight)
Deliverable Grades U.S. long grain rough rice
1. No. 2 or better
2. 65%< total milling yield including 48%< head rice
3. 500-gram sample with no heat-damaged or stained kernels, and a max of 75 lightly discolored kernels per sample
Contract Months Sept, Nov, Jan, March, May, July
Trading Hours Open Outcry: Monday-Friday 9:30am-1:15pm CST
Electronic: Sunday-Friday 6:33pm-6am, 9:30am-1:15pm CST
Last Trading Day Business day prior to the 15th calendar day of the delivery month
Last Delivery Day Seventh business day following the LTD of the delivery month
Price Quote Cents per cwt
Tick Size .5 cents per cwt ( per contract)
Daily Price Limit 50 cents per cwt (,000 per contract) above or below previous day\'s settlement price.

Understanding Rough Rice Contracts
Like every commodity, rough rice has its own ticker symbol, contract value and margin requirements. To successfully trade a commodity, you must be aware of these key components and understand how to use them to calculate your potential profits and loss.

Each single tick move in rough rice is the equivalent of half of a penny. Every half penny is the equivalent of $10. A rough rice contract is measured in hundred weights (cwt). One rough rice contract is 2,000 hundred weights (cwt) (the equivalent of 91 metric tons) with the trading price reflecting the value of one (1) hundred weight.

For instance, if you buy or sell a rough rice futures contract, you will see a ticker tape handle that looks like this:

RR8K @ 2482.5

This is just like saying "Rough Rice (RR) 2008 (8) May (K) at $24.825/hundred weight (2482.0)." A trader buys or sells a rough rice contract according to this type of quotation.

Depending on the quoted price, the value of a commodities contract is based on the current price of the market multiplied by the actual value of the contract itself. In this instance, the rough rice contract equals the equivalent of 2,000 cwt (hundred weights) multiplied by our hypothetical price of $2,482.5, as in:

$24.825 x 2,000 cwt = $49,650

Commodities are traded based on margin, and the margin changes based on market volatility and the current face value of the contract. To trade a rough rice contract at the CME Group requires a margin of $2,025, which is approximately 4% of the face value of the rough rice.

Calculating a Change in Price
Because commodity contracts are customized, every price movement has its own distinct value. In a rough rice contract, one-half of one cent is equal to $10. When determining CME Group's rough rice profit and loss figures, you calculate the difference between the contract price and the exit price, and then multiply the result by $20 (one full cent). In other words, every $1 move in rough rice is the equivalent of $2,000. For example, if prices move from $2,194.0 to $2,482.0, you multiply the difference, which is $288.0, by $20 to yield a contract value change of $5,760.

- Buy Sell Total Value
Rough Rice Contract Price (1 cent move = ) .94 .82 .88 cents or ,760


Rough Rice Exchanges
Rice is traded at the Chicago Board of Trade (CBOT). The Dalian Commodities Exchange (DCE) in China is currently preparing to launch the rough rice futures to diversify its product offering.

Facts About Production
Just over 620 million metric tons of rice were produced worldwide in 2005, with figures approaching 630 million metric tons for the 2007-2008 season. Although yields have nearly doubled in the past 40 years, from 2.2 million tons per hectare to 4.1 million per hectare, they have remained virtually unchanged for the past decade due to the prevalence of higher yielding varieties that produce more grain and require less water. Nearly all of the rice harvested is consumed as food, although a small portion of it is used for distilling to make sake in Japan or soju in Korea.

The in 2008, U.S. produced 2% of the global harvest, but made up approximately 13% of total world exports, trailing Thailand, Vietnam and India. Several nations import enormous amounts of rice to support domestic consumption. Most notably, consumption in India and China shows no signs of abating. While this could bode well for the U.S. export market, it is important to understand that rice prices are subject to international supply and demand numbers more than they are to domestic U.S. numbers.

China and India alone account for half of the world's rice production. A sudden surplus of rice due to lower consumption or an import ban could cause prices to collapse, just as famine could cause a drastic inflation in the price.

Another important factor to consider in price analysis is the cost of other grains and seeds. Corn, wheat and oats have recently enjoyed a bull run in prices due to energy policies in the U.S., and rice has ridden on their coattails. Less acreage planted with rice, in favor of high-priced grains and seeds, has helped reduce rice plantings, which in turn has contributed to recent lower worldwide stocks, and therefore higher prices.

Factors That Influence Rough Rice's Price
The price of rough rice is influenced by the following factors:

  • Rice is a global commodity whose importance rests on its status as a staple food source for some of the most populous nations on earth.
  • Growing demand in premium production nations such as China and India has an important impact on prices.
  • Climatologic changes in South Asia and the U.S. will impact prices profoundly, especially given the intense water requirements for growing rice.
  • Rice prices from 2004-2008 were affected by rising fuel and fertilizer expenses, leading to a doubling of price in just four years.
  • In 2007-2008, global rice stocks were calculated at 72 million tons. This was the lowest in global rice stocks since 1983-84 and approximately half of the peak in 2000-01.
  • Since the 1980s, rice has seen a 40% increase in demand worldwide.
  • As of 2008, Thailand is the world's largest rice supplier, exporting 7.3 million metric tons in 2006 and 8.5 million metric tons in 2007.
  • The Philippines import about 15% of its rice. In the 1970s, it was a net exporter before real estate development.
Conclusion
Although rice is a staple in the diets of over 2 billion people worldwide, commodity exchanges around the world have taken a long time to develop contracts for it. As more commodity exchanges do incorporate rice as an offering, the hope is that prices will stabilize and a more realistic picture of supply and demand will emerge.

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