Can rice bounce back from its record lows?

Rice has been one of the worst performers in the commodity complex this year. It's down 25% to $11.33 per 100 pounds for September delivery. That's a record low relative to wheat. Measured in metric tonnes, rice is at a $53 discount to wheat. The last time the discount was this wide was in February 2008, "two months before rice reached a record in a global food crisis", according to Bloomberg. But is another spike on the cards?

Rice exports from Pakistan, the third-largest shipper, may plunge 22% below average this year after floods destroyed crops, according to exporters. Add this to the drought in Thailand and that's 43% of the world's global rice exports. That's a serious threat to what was until recently a plentiful supply outlook.

On the demand side, rising wheat prices are expected to affect the diets of those living in emerging markets. Consumers will opt for a variety of cheaper substitutes, including rice. Indeed, a possible demand spike has spurred analysts into feeling optimistic. "We're very bullish and see the chance of a significant return," says Jonathan Barratt at Commodity Broking Services. The Economist Intelligence Unit is forecasting that rice will rally nearly 100% to $22.45. Standard Chartered has a more modest $18 price target.

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Other analysts, however, see little risk of the rice price taking off. Short-term supplies may be dented but stockpiles will not. Global production will rise 3.7% to 459 million tonnes by 2011 and stockpiles will reach 97.5 million tons, according to USDA forecasts. As Kona Haque from Macquarie Group puts it, although the supply situation looks dire in a few specific countries, "prices are unlikely to spiral upwards to the same extent".

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