Japan rice futures may help farmers hedge post-quake

A trial listing of rice futures in Japan could be well timed as the country's farmers face growing uncertainty over the potential impact from the March 11 earthquake and tsunami on this year's output.
Also adding to the need for a hedging tool, a recent reform allows farmers to choose whether to comply with the government's policy of curbing rice output in exchange for subsidies, while distribution channels have diversified and a central agricultural co-operatives group is losing its power.
"There is no market now that sets a benchmark price for rice, but a futures market will offer a tool on which producers, distributors and end-users can base their business decisions," Ryo Kimura, chairman at Rice Millers and Distributors Co-operative, told Reuters.
Two domestic commodities exchanges - the Tokyo Grain Exchange and the Kansai Commodities Exchange - have applied for an experimental two-year listing of rice futures, the first since the state took over production and distribution in the run-up to World War 2.
Government approval seems likely after Farm Minister Michihiko Kano said on Friday that it was difficult not to approve, as it is a trial, and that he would decide early next week. Exchange officials say they need a three-day weekend to prepare, so the earliest start for listing would be July 19.
The ministry rejected a similar attempt five years ago due to worries that futures trading could lead to price swings and disturb a system under which it kept the price steady by controlling output. The so-called "actual price" for rice is generally set on a one-on-one basis with the central agricultural co-operatives group, Zen-noh, which handles about 40 percent of some 8.5 million tonnes of rice distributed in Japan.
Wholesalers buy at the price Zen-noh sets while their selling price is determined by prices of rice sold at supermarkets, which have stayed depressed due to Japan's persistent deflation. That in turn has squeezed profits at wholesalers and also dampened incentives for farmers.
"A futures market offers a fair benchmark which helps farmers plan costs and stabilise their business," Tokyo Grain Exchange President Yoshiaki Watanabe told Reuters. "Subsidies for those complying with paddy reduction are based on the average cost of rice output across Japan, which does not reflect different production risks at each region. This gap exposes rice growers to the impact of even a small change in prices," he said.
The March 11 earthquake also favours rice futures as a hedge as volatility is expected to rise when the rice harvest begins in the autumn. For two weeks after the quake, rice virtually disappeared from shops even in Tokyo areas, which are about 200 kilometers away from the radiation leaks from a crippled nuclear plant in Fukushima in north-east Japan.
Wholesalers had been reducing stocks for cost efficiency, resulting in a shortage of rice when demand surged. This pushed a key brand up by about 30 percent, Kimura said.
"If there is a futures market, we can have inventories. We can buy and sell to limit the damage in case prices rise in the future above where we have fixed to sell," he said. The impact of potential radiation contamination from areas near the nuclear plant at the time of harvest is unclear, fuelling speculation that supplies may be tight and prices higher.
Due to such speculation, the government has so far bought less than 40 percent of the 200,000 tonnes it targets to buy annually for its rice reserves. The government typically ends auctions before the harvest. Market players say there is little chance that speculative money will disrupt the trial listing of rice futures.
Rice is produced and consumed domestically and is independent of a global benchmark set in Thailand, leaving very little incentive for speculation, said Shinichi Shogenji, professor and agriculture expert at Nagoya University.
Shogenji expressed concern over the risk of the government trying to manipulate prices through its reserve system or other means and that a clear and transparent rule should be set to prevent such potential behaviour. Japan's commodities exchanges have long been suffering from plunging trading volumes and some market players have pinned hope that a new product listing could raise investor interest. An official at a major Japanese trading firm said it sees business opportunities for risk management when more types of commodities are closely linked to market prices.