2010-07-21 10:15

BEIJING - Rice futures are expected to extend a rally that began in early July as torrential rains across southern China may result in lower production levels of the grain.

Heavy rains combined with crop damage from insects are estimated to have cut rice output in China by 10 percent, with some major farming areas forecasting a 20 percent production decline, according to cngrain.com, a website owned by China Grain Reserves Corp, a State-owned entity that stockpiles grain.

The harvest of the early indica type rice may be delayed by seven to 15 days, the site reported.

"The situation is worse than expected and a postponed harvest will have an adverse impact on late indica rice crops, which have yet to be sown," said Jing Zhuocheng, an analyst at Shanghai CIFCO Futures Co.

Early long-grain non-glutinous rice for January delivery, the most active grain contract on the Zhengzhou Commodity Exchange in Henan province, traded 0.05 percent higher than Monday's settled price to close at 2,146 yuan per ton on Tuesday.

The contract has cumulatively advanced 3.7 percent so far in July, after a persistent drop of 5.7 percent from April 22 to June 30.

"The expected output drop may attract more speculative cash into the market, pushing up futures' prices to a higher level," sad Ding Sunya, an analyst at Wanda Futures Co Ltd.

As of July 12, adverse weather has washed out 1.13 million hectares of field crops in eight provinces and cities, including Hunan and Jiangxi provinces, which are the nation's main rice-growing areas, according to the Ministry of Agriculture.

The supply deficit may raise the purchase price of rice, analysts said.

China, the world's biggest consumer of rice, has set minimum purchase prices for the crop, under which the government will buy up rice when the market price is below the State-set level in order to protect farmers' interests.

This year's minimum purchase price is set at 1,860 yuan per ton. Analysts estimate that purchase prices in Hunan province will be higher at 1,900 yuan per ton.

Farmers may be reluctant to sell their products, however, as they may expect higher prices - following the tactic used by wheat farmers, and thus reducing supply, Jing said.

But analysts also said the huge stockpiles of the grain amid the expansion of the growing area this year, may partly offset output losses by erasing the gap between supply and demand.

Currently, rice stocks remain at sufficient levels, and as such, the futures market may lose steam for further growth, Ding said, adding that output for late indica rice crops may suffer more losses if a drought were to follow the recent floods.

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