Rice-a-rally?
Fundamentals
Having watched Sugar futures soar to 28-year highs recently on concerns that a disappointing monsoon season in India would force the world's leading sugar consumer to import sugar. Some grain traders believe that Rice futures could be the next market to feel the effects of India's plight. According to Indian government officials, the annual monsoon rains were estimated to be 26% below normal for the period beginning on June 1st. The lack of rainfall has forced Indian Rice producers to plant about 20% less acres of Rice this season. Last year 34.1 million hectares were devoted to Rice production vs. only 27.2 million hectares this season. The lack of rain has caused the price of food staples to rise by 30%. However, government stocks of Rice are considered ample at the present time, unlike that of Sugar. Also, rains have finally come to some of the northern growing regions of India, which has raised some hopes that some of the crop damage due to drought could be diminished. In the most recent USDA Crop Production report for August, government forecasters estimated world Rice carry-over for the 2009-10 season would fall to 84.04 million metric tons (mmt), down from 94.51 mmt in the July estimate. However, U.S. Rice carry-over is expected to increase to 23.9 million hundredweight, up moderately over the July estimate. Though Rice futures are little known outside of the old CBOT floor, this market has a history of making sizeable trending moves, especially if large speculative traders enter the market. This could cause volatility to soar, especially if the current crop problems in India turn for the worse.
Trading Ideas
Given the potential for increased volatility in Rice futures going into the fall, some traders may wish to investigate potential trades in the Rice futures options market that will take advantage of an increase in volatility. One such trade would be buying strangles. A long strangle position is made up of a long call and a long put in the same trading month but at different strike prices. An example of a long strangle in Rice options would be buying the November 14.20 calls and buying the November 12.60 puts. With November Rice trading at 13.50, the straddle could be purchased for about 44.5 points, or $890 per strangle, not including commissions. The maximum risk on this trade would be the premium paid, and the trade will be profitable at expiration in October if November Rice is trading above 14.645 or below 12.155.
Technicals
Looking at the daily chart for November Rice, we notice prices continue to hover above the key 100-day moving average (MA), which is viewed by many technical traders as a longer-term bullish signal. However, the 20-day moving average is acting as resistance, which is keeping short-term momentum traders from turning bullish. The 14-day RSI is stuck in neutral territory with a current reading of 28.25. The recent highs of 13.855 are seen as the next resistance point for November Rice, with the 100-day MA, currently near the 12.855 area, seen as support.
Mike Zarembski, Senior Commodity Analyst
