Are Indian rice producers in a sweet spot?
The coronavirus pandemic has been forcing the world to reduce dependencies. From the mountains of Himalayas to the desert of South America, theme self-sufficiency is gaining popularity. Food security is an indispensable part of self-sufficiency.
UAE growing its own rice became the headlines a few weeks ago. It was an experimental project undertaken by the UAE University in collaboration with the Rural Development Administration of South Korea. If this pilot project is replicated successfully on a large scale, it has the potential to change the face of agriculture in the Middle-East region. Rice is a water guzzling crop but modern agritech is now making it possible to grow one of the world’s most widely consumed staples even under extremely challenging climatic conditions.
That said, agritech isn’t solving any problem immediately. If traditional rice producers can’t produce or export enough rice, countries depending on imports are bound to suffer until they become self-sufficient. After all, it’s difficult to change food habits.
No wonder, the FAO All Rice Price Index jumped to a 9-year high in April and rice prices remained strong even in May.
What’s causing a rally in rice?
- Thailand, the world’s second-largest rice exporter, faced the severest draught in the last 40 years. According to an estimate of the Foreign Agricultural Services of US Department of Agriculture (USDA), the draught in Thailand may result in a loss of USD 840 million of agriculture production led mainly by the loss of rice production.
- As you might be aware, Vietnam, the world’s third largest rice exporter, had prohibited rice exports in March, allowed them partially in April and entirely relaxed the export curbs in May. However, the uncertainty drove prices of rice in the international market higher.
- India is the world’s largest rice exporter. Lockdowns threw Indian supply chains into complete disarray for many exporters.
When the supply from the top-3 exports is affected, prices can only go up. But the moot question is, will they sustain?
What to expect
According to the Food and Agriculture Organization of the United Nations, the world is likely to produce 508.7 million tons of rice in 2020/21. On the other hand, the consumption is estimated to be 510 million tons—causing a minor dip in the inventories. Moreover, the global rice trade volume is expected to be 47.6 million tons in 2021—an increase of over 6% on Y-o-Y basis. In 2018, the global rice trade had peaked at 48.5 million tons.
Opportunity for Indian exports?
Just-in-time inventory and over-reliance on a single source will soon become history for rice importing nations. When Vietnam imposed curbs on exports, various nations were in the process of increasing their rice inventories for emergency situations. As a result, the prices of Thai rice shot up. The per ton price of Thai-25%-rice averaged USD 479 in the first 5 months of 2020. During this time period, similar Vietnamese, Pakistani and Indian varieties averaged USD 379, USD 362 and USD 365, respectively.
Interestingly, China and India together account for more than 80% of global rice stockpiles. Cheaper Indian rice exports may help many countries undertake contingency stocking, at affordable prices, thereby helping keep global price inflation in check, going forward.
Although there is no restriction on exports from Vietnam as of now, it seems the damage has been already done. The rice, which was contracted to be exported, couldn’t be shipped due to export ban/curbs and it had started to degrade slowly by the time export restrictions were lifted. Let’s not forget, if the contracted commodity isn’t shipped, costs still keep on adding, which includes container frights, fines/late-fees and other damages. Hundreds of Vietnamese rice exports are facing financial distress now.
Moreover, clouds of uncertainty loom over the outlook of rice exports from Vietnam, as the country has been running short of its targets of domestic stockpiles, which make the future export policy uncertain.
In Thailand, the government has already advised farmers to consider alternative crops to rice for off-season farming.
Countries such as Malaysia and Philippines have been keen to buy Indian rice. Indian exporters have also been eying African markets. The country is expecting a normal rainfall and a bumper rice crop. India has a huge inventory of milled as well as un-milled paddy.
In 2019-20; India seems to have recorded the lowest rice exports in the last 8 years. Industry experts are predicting a 15% jump in India’s export this season. As India endevours to reduce its trade deficits with various nations, rice exports might become strategically important.
What’s in store for equity investors?
Unfortunately, only a few rice producers in India are listed. The stock prices of the leading companies had peaked in 2017 and touched multi-year lows in the early days of lockdowns. Under the dynamic market conditions, the stock prices seem to have found some stability again.
If you decide to buy into any of the listed companies, do keep an eye on global trends and domestic production stats. It remains to be seen whether recently announced agricultural reforms help boost realizations for farmers without much impact on the competitiveness of exporters. The Rupee depreciation might provide further tailwinds to Indian exporters. Needless to say, companies enjoying higher profit margins, earning higher Return on Equity (RoE) and managing debt judiciously may have an edge over others.
Please Note (read as a disclaimer): None of the stocks discussed in the article are a recommendation to buy, hold or sell. This could just be the starting point for deeper analysis that you might want to carry out on your own. You may also take professional help as you feel appropriate.
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Disclaimer: We, Ventura Securities Ltd, (SEBI Registration Number INH000001634) its Analysts & Associates with regard to blog article hereby solemnly declare & disclose that:
We do not have any financial interest of any nature in the company. We do not individually or collectively hold 1% or more of the securities of the company. We do not have any other material conflict of interest in the company. We do not act as a market maker in securities of the company. We do not have any directorships or other material relationships with the company. We do not have any personal interests in the securities of the company. We do not have any past significant relationships with the company such as Investment Banking or other advisory assignments or intermediary relationships. We are not responsible for the risk associated with the investment/disinvestment decision made on the basis of this blog article.