That prompted me to take a look at the supply/demand fundamentals of rice, and conclude that things were teed up for a potential rally in this unsung grain.
A recent Wall Street Journal article reported farmers are reducing acreage for rice by as much as 30 percentin favor of higher-priced cotton and soybeans:
A shift in planting likely will come in the spring when farmers sow their fields in Arkansas and Louisiana, analysts said. They are projecting as much as a 30% cut in acreage devoted to long-grain rice. Growers will turn to soybeans, cotton or other crops after becoming frustrated with rice prices, which have lagged behind other agricultural commodities.You can read my entire rough rice analysis here.
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.
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.
Since writing this piece, rice has rallied back up towards 16 cents - a key area of resistance in recent years:
Rough rice for March 2011 delivery. (Source: Barchart.com)
I was hesitant to "go long" rice until it broke through this resistance. Unlike value investors in stocks, we commodity traders prefer to buy on strength rather than weakness. So a decisive break to the upside, combined with the positive underlying fundamentals discussed, would be the cue I'd like to see.
But when I pulled up the chart of the May contract, I saw that there was in fact a significant breakout today:
Rough rice for May 2011 delivery - it's a bull market! (Source: Barchart.com)
So, when Asia's trading opened up at 4pm Pacific, I picked up a May contract in Rough Rice at an entry price of 16.24.
We'll set the initial stop around the 13.50 mark, where there appears to be some decent support. I also like to use a 15-day low as another stop guidepost when dealing with the grains.
We'll keep an eye on this trade and breakout as things progress.
Let's go rough rice!