Have you ever thought about how to invest in rice? This article will provide 5 tips on how a smart investor could get involved in this commodity market.
Until recently, the opportunity for the retail investor to invest directly in rice farmland would not have been possible. This direct investment opportunity would only have been available to investment funds.
All that has changed now that an alternative investment company has introduced an investment where the investor can invest directly in the land of African Rice. This investment would cost the investor £5,850 and secure 3 hectares of prime rice land for 49 years. The investor would obtain a canceled return of around 15% and would benefit from capital appreciation on the ground. If the investor were prepared to hold this investment for 5 years, he could expect to achieve 287% of his initial investment.
If you want to invest in the financial markets, buying a rough rice futures contract could be the way to go. Its symbol is ZR.
The rough rice futures contract is trading at the price per bushel, which is currently around $14.50. The number of bushels in a full contract is 2,000. They are traded on the Chicago Stock Exchange and the minimum price movement in the contract is $10.
This market is only available to high net worth investors, and many brokers will ask for detailed financial records before allowing you to open an account.
To invest in a futures contract, you will need to put up an initial margin of approximately $2,430 at current market prices. This is called initial margin and if your future contract enters a losing position, you will be required to top up your account. This is called a margin call.
A cheaper way to invest in the futures market is to buy an options contract on a future. If you think the price of the underlying asset will go up, you buy a call option and if you think the price will go down, you buy a put option on the underlying futures contract. The benefit of an option contract is that you only risk the premium you paid to buy the option and the amount of capital that needs to be put on margin is much less than $250.
A riskier strategy with Options is to write option contracts, that is, sell them. This exposes the investor to unlimited losses and brokers will verify that he has sufficient capital to cover potential losses before allowing him to enter into this contract.
Options and futures are really only available as an investment for sophisticated investors or high net worth investors. Retail investors will not be allowed to participate in these markets by the financial regulator in their own country.
The retail investor can invest in rice by investing in an exchange-traded fund. There are no 100% paddy rice ETFs, but there are some that have a percentage allocation to paddy rice.
A potential ETF that the investor could choose is Elements International Commodity Index-Agriculture Total Return (RJA). This is a well-diversified index that includes allocations in the following commodity types, corn, wheat, cotton, soybeans, coffee, live cattle, sugar, cocoa, lean pork, rubber, and several others, including rice).
This Powershares ETF is based on the DBIQ or DB Agriculture index. This index includes a number of commodity futures contracts within the agricultural sector. This index is intended to track the underlying performance of the soft product category of the commodity index. The main holdings in the Funds index are corn, soybeans, sugar, live cattle, cocoa and coffee.
The Rogers International Commodities (RICI) Agriculture Index has been tracking the soft commodities category since December 2005. It has a 2.15% weight in rough rice. To invest in this index, you need to find a broker who specializes in this index.
For the UK investor, an alternative to futures, options and ETFs is spread betting. Some of the spread betting companies will allow you to bet on the underlying futures price as quoted on the Chicago Stock Exchange. The minimum bet size is just £0.50 and an investor only requires 3,250 in their account. Spread betting has many advantages over futures and options in that the capital requirement an investor needs is much lower. This is an ideal investment in the UK as profits from spread betting are tax free.