ANALYSIS-Rice, wheat prices diverge as fundamentals clash

By Naveen Thukral

KUALA LUMPUR, May 2 (Reuters) - Unprecedented volatility in
rice and wheat prices has upended the traditional price link
between the world's two staple foods, and analysts say it may
stay broken for longer than usual this time.

After decades when prices usually moved in lock-step with
each other, the two have diverged in recent months. Thai rice
is now nearly three times the price of U.S. wheat, an almost
record high premium that could force aid agencies, and poorer
consumers, to favour the cheaper staple, analysts say.

Although it is unlikely to cause a big enough change in
behaviour to rebalance prices swiftly, they say that over time
wheat prices should ultimately move closer to the Asian staple.

"Wheat may go down 15 percent to 20 percent from current
levels, but rice is going to stay more expensive because the
governments now have tendencies to build stocks," said John
Baize, a U.S.-based commodities analyst.

"The differential will be pretty high."

Since 1980, hard red winter wheat in the U.S. Gulf of
Mexico has traded at an average of 43 percent less than rice in
Thailand, the world's top exporter, IMF data show.

By and large, wheat prices traded at between 40 and 60
percent of the price of rice, and any deviation was quickly
corrected. But prices are now testing the extremes of that
bond.

Back in October, wheat prices zoomed to near parity with
rice, as speculators piled into the U.S. grains market amid a
heavy drain on global stocks; that has happened only once
before.

Since then, wheat markets Wc1 have plunged nearly 40
percent from February peaks as farmers plant a bumper crop,
while rice prices RI-THWHB-P1 have nearly trebled to a record
above $1,000 a tonne on panic buying fuelled by export curbs
from India and Vietnam, though they are now showing signs of
easing.

For a graph showing the price relationship click on:
here
Ricevswht.gif

"Rice prices have overshot, but it is partly an adjustment
of rice prices in relation to wheat prices," said Nobuyuki
Chino, president of Unipac Grain, based in Tokyo.

Wheat, at the moment, is about one-third the price of rice,
a gap that may widen before it narrows again.

STRANGE RELATIONSHIP

On the surface, the relationship is a strange one.

Wheat and rice rarely vie for the same crop land. While
most rice is grown and consumed in very wet areas of Asia,
production of wheat is more widespread around the world, mostly
grown on drier land that would be inhospitable to rice.

Most consumers are also unlikely to switch between the two,
although analysts say sustained higher prices could shift
demand at the margins, particularly in countries with larger
impoverished populations to feed.

"A lot of Asian countries are importers of wheat, so there
could be some substitution," said Darren Cooper, senior
economist with London-based International Grains Council.
"...particularly in a country like Indonesia, they import quite
a lot of wheat."

In Japan, the world's fourth-largest wheat importer, the
government is campaigning to encourage households to eat more
rice, of which it has more than enough, instead of noodles or
bread, which require imported wheat. [ID:nT326799]

Aid organisations, which usually work on tight budgets,
would also prefer to distribute wheat instead of rice.

"They obviously have a fixed budget, so they will go for a
cheaper substitute," said one Singapore-based grains trader.
"As a result (of high price), whatever rice was going (in aid)
may also stop."

Still those quantities are small. The World Food Programme
bought just over 2 million tonnes of food last year, of which
rice was about 15 percent while wheat and wheat flour were 23
percent.

The world's combined output of rice and wheat is around 1
billion tonnes a year, although only about 135 million tonnes
of that is freely traded on the global market.

On top of that, the fundamental differences in the way rice
and wheat trade makes any near-term correction difficult.

Global wheat prices are determined on the CBOT futures
exchange, where traders are already anticipating a strong
rebound in supplies this year. Rice prices are determined in
the opaque, over-the-counter physical market in Bangkok,
meaning prices are unlikely to fall too far until new crops are
delivered.

In the longer-term, however, wheat prices may ultimately
find their equilibrium at a higher price relative to rice, as
rising income levels in China, India and elsewhere in Asia
drive up consumption of protein-rich meat at the expense of
rice.

"The gradual increase in the numbers of middle class who
demand more meat-based food that requires cereals rather than
rice for the feed," said one London-based grains analyst who
declined to be named.
(Editing by Jonathan Leff and Ramthan Hussain)