Betting On A Potential Rally In Rice With These ETFs (VNM, THD, RJA)
Jim Rogers, a fervent agricultural bull since he launched the Rogers International Commodity Index in 1998, recently cited rice as his favorite grain. He told MoneyNews:
When Jim casually name-drops a commodity—especially a grain—it’s usually advisable to take a closer look at it. So let’s dig into the investment-worthiness of rice and see if we should order up a side dish for ourselves.
Lower Acreage, Lower Supply
A recent Wall Street Journal article reported farmers are reducing acreage for rice by as much as 30 percent in favor of higher-priced cotton and soybeans:
With corn, soybeans, cotton and rice often competing for the same land, the sharp speculator can often do quite well buying the laggard(s)—which, in this case, is rice.
Rough rice is still well off its 2008 highs—and with potential acreage reductions on tap, we could see a breakout soon. (Source: Barchart.com)
A price-lagging grain often rallies eventually because farmers usually neglect planting it; they instead plant the crops that have already rallied, thus creating a shortage in the laggard grain and inevitably higher prices.
In fact, we just saw this play out with cotton: Soybeans and corn have rallied for years, while cotton’s price has languished. So farmers who traditionally had planted cotton increasingly eyed for the sexier returns its ag cousins could bring instead. Supply fell—and soon after, prices rocketed:
When cotton broke out—thanks to supply constraints—it really spiked! (Source: Barchart.com)
Around the world, rice exporters are projecting lower crop yields for 2011. Thailand, the world’s biggest exporter of rough rice, predicts its main harvest will be off 5.3 percent this year due to devastating floods—the worst flooding in five decades (Source: Bloomberg). And Egypt, another major rice exporter, is having its issues as well; the USDA reports that Egypt’s harvest area for 2010/2011 is down 30 percent from the previous year:
Demand Projected To Outstrip Supply
Last November, at a global rice conference in Hanoi, industry experts expressed worries that the world would see a shortage of rice within the next decade:
“Projected demand for rice will outstrip supply in the near to medium term unless something is done to reverse current trends of slow productivity growth,” said Robert Zeigler, director general of the International Rice Research Institute.
“It does not look to be at a crisis level, but it’s possible that supplies will tighten a little bit,” Zeigler said.
Demand is rising at 1.5 percent a year, but productivity increases—which surged from the 1960s through the 1990s—have dropped to about 1 percent a year. Couple this with the previously discussed acreage reductions, and the math starts to look pretty attractive for rice prices.
Where To Buy Your Rice
If you’re looking to invest like Jim Rogers and get some exposure to the grains, rice may seem like an attractive and reasonably priced starch for your plate today.
But investing in rice isn’t as easy as running out to the supermarket, loading up on Uncle Ben’s and flipping your stock after prices spike. (Although given the precarious state of the global economy, it may not be a bad idea to have some extra dried foods on hand.)
There’s not (yet, at least) a pure ETF play on rice, but you can get some tiny exposure to the rice complex (along with other grains) via the ELEMENTS Rogers International Commodity Agri ETN (NYSE:RJA). Rice makes up a whopping 1.43 percent of the portfolio. Other options, however, include:
- Rough rice futures contracts – You can always just pick up a rough rice futures contract directly – just make sure you roll it over, though, before you get an unwanted special delivery!
- Buy the countries that export rice – Thailand and Vietnam are, respectively, the world’s two biggest exporters of rice. While normally it might be a bit of a stretch to bet on an entire country thanks to a bullish crop (after all, you wouldn’t buy S&P calls to play rising corn prices), Thailand and Vietnam are much smaller economies that are pretty highly levered on rice. In fact, Vietnam appears downright pumped about the prospect of higher rice prices!
And as luck would have it for rice bulls, these Southeast Asian tigers also boast some of the most favorable long-term demographics in the world (according to economic forecaster Harry Dent).
The iShares MSCI Thailand Index Fund (NYSE:THD) and the Market Vectors Vietnam ETF (NYSE:VNM) are the two ETF tickers to look for in Southeast Asia:
Thailand has rallied over 20% since summer—but has been chopping sideways of late (Source: StockCharts.com)
Good morning, Vietnam! Since December’s breakout, we may have a nice pullback buying opportunity in front of us. (Source: StockCharts.com)
Buy The Breakouts
Most commodities tend to trend, but I’ve found this especially true with the ags and softs. So be patient on these trades. Whether you’re buying ETFs/ETNs, futures or entire countries, these trades aren’t going to get away from you until they break out to new highs.
Commodity legend William R. Gallacher discussed the importance of buying breakouts in his trading manifesto Winner Take All. Gallacher first identified a favorable fundamental setup, then waited for a price breakout to go long. The idea is as relevant today as when it was first published in 1993.
While Gallacher used only 10-day breakouts as his cue to enter a trade (and 10-day lows as a cue to sell), you can adjust and refine these according to your trading or investing style.
As we’ve explored here with rice, the fundamentals are on our side, so it’s a matter of sitting back and waiting for the market to confirm our bullish hypothesis. And when it does—let’s be ready to buy these breakouts!
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