Oryza Rice Recap - Can Vietnam Manage a Repeat Performance in 2012? Will India to Export 6 Million Tons of Rice in 2012? Will the Euro Blow Up, Leaving Markets Clouded in a Haze of Volcanic Ash or is the Eurozone “Too Big to Fail?”

Rice prices continue to tick lower with Thai, Viet, and Pak rice sellers lowering their quotes by about $5 to $15 per ton today.  South American rice remains the most expensive at about $570 per ton for 5% broken, followed by about $535 per ton for Thai 5%, then around $530 per ton for U.S. 4%.  Viet 5% rice is quoted around $445 per ton but the Vietnam Food Association (VFA) has set a floor price of $500 per ton. Pakistani 5% rice is shown about $430 per ton and Indian 5% at about $435 per ton. 

In 2011, Vietnam exported about 7.11 million tons of rice, up from about 6.75 million tons in 2011, worth about $3.5 billion.  Vietnamese rice industry officials say that 2012 will be a tough year for Viet rice exports. With increased competition, especially in the low quality sector, from cheaper Indian and Pakistani rice, officials are advising farmers to focus on planting high quality rice. Officials hope that Vietnam can earn a premium for its rice and avoid a race to the bottom, though it still expects sales to decline to 6.5 to 7 million tons in the coming year.  Speaking about competition from India and Pakistan, the head of the Vietnam Food Association (VFA) said, “The increased competition from these suppliers means Vietnamese and Thai rice products of better quality will see slower sales.”  The official has all but given up on the low-end market to Africa saying that Vietnam’s export sales to the region will likely be taken over by India and Pakistan. India last week indicated that it has no plans any time soon to reinstate the export ban on non-basmati rice as supplies remain sufficient. New Viet export sales have been slow and Vietnamese exporters have yet to secure any major contracts for 2012 which is not typical for this time of year.  To compensate, Vietnam is hoping to compete with more expensive Thai rice, and will try to expand into high-end markets including China. 

Speaking of rice buyers, the Philippines’ National Food Authority (NFA) late last week said it may hold an auction in the middle of February for permits allowing private importers to buy up to 500,000 tons of rice in 2012, though importers are allowed to secure deals with rice exporters before the permits are awarded.  The NFA also needs to get the Finance Department’s approval to exempt these rice imports from duties. The head of the NFA suggested Philippine rice importers would look to act early citing the Thai rice mortgage scheme’s support for Thai rice prices and the VFA’s official price for of $500 per ton for 5% broken Viet rice, among other prices for lower-grade varieties. 

Vietnam is also considering a provision for the state to provide 0% financing for farmers to purchase equipment for producing, harvesting, and milling rice. The preferential loan rate for farmers is currently about 16% to 17% and a rice trader in Vietnam said reducing it to zero is an unlikely option. 

While world rice prices continue to tick lower, analysts in the U.S. think the U.S. market is poised to move higher but concede that a lot depends on factors outside rice market fundamentals.  A fourth generation rice farmer in Texas said, "It (the rice market) is kind of hard to figure out right now. There are strong indicators in both directions. A lot of it depends on the euro and what happens to European economies. If Europe doesn't get its monetary system fixed, rice is going to be a big loser." One commodities trader said everyone would be feeling quite bullish [about commodities markets] and optimistic about 2012 if it weren’t for the Eurozone crisis.  Optimists think the euro is too big to fail and pessimists say the staggered levels of debt are too big to be saved. 

Recent developments in Europe suggest a “death by a thousand cuts, a slow slicing form of torture and execution from Imperial China.  In modern times the phrase captures a creeping normalcy or the way a major negative change which happens slowly in many unnoticed increments, is not perceived as objectionable. For Europe, the death by a thousand cuts will be the loss of both confidence and liquidity in financial markets, and possibly the wider economy and society in general.  When confidence falls, it can lower liquidity and when liquidity falls it can lower confidence in a downward spiral.  Data shows that European banks receiving ECB liquidity are choosing not to pass this liquidity on to the wider economy, but lacking confidence, are instead parking the funds at the ECB.  In addition, French President Sarkozy and German Chancellor Merkel today met an agreement to impose a Tobin tax, or financial tax, on financial transactions. This will surely do banking liquidity no favors. 

Things are not rosy elsewhere in the world. The U.S. economy remains fragile and China too faces a property crash that could threaten to meet or surpass that of the U.S. 

While the Friday’s U.S. labor report was initially met with glee but the sparkle quickly faded as analysts dived into the details showing much of the increase in payrolls may be reversed after the holidays. 

China last week announced it would take measures to provide short-term liquidity to the banking sector and many expect it will lower banks’ reverse ratio, or that amount of capital they must hold in proportion to loans.  A lower ratio should free up capital for lending.  There are increasing signs of trouble in the Chinese property market. Real estate sources say that prices fell in 60 out of 100 cities, including the nation’s 10 largest cities. The China Index Academy’s vice president, Huang Yu, said “The land market now enters its ice age, with prevalent slumps in both sales volume and prices.” Falling property values will decrease the value of collateral; possibly putting the nation’s banking industry at risk if property owners default on their loans.  Chinese banks may find themselves in similar situations as those in the U.S. following the collapse of the property market – banks holding loans that are higher than what the property is valued.  In the meantime, the Chinese government seems eager to keep feeding liquidity into the system and let the good times roll, for now.