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Ever thought about how to invest in rice? This article will provide 5 suggestions on how a savvy investor could get involved in this commodity market.
Until recently the opportunity for the retail investor to invest directly into rice farm land would not have been possible. This direct investment opportunity would have only been available to investment funds.
All that has changed now as one alternative investment company has introduced an investment where the investor can invest directly into African Rice land. This investment would cost the investor £5,850 and would secure 3 hectares of prime rice land for 49 years. The investor would get a annula return of around 15% and benefit from capital appreciation in the land itself. If the investor was prepared to hold this investment for 5 years they could expect to achieve 287% on their initial investment.
If you wanted to invest within the financial markets, the purchase of a Rough Rice futures contract could be the way to go. Its symbol is ZR.
The Rough Rice Futures contract is quoted on the price per bushel which currently is around $14.50. The number of bushels in a full contract is 2000. They are traded on the Chicago Board of Trade and the minimum price movement on the contract is $10.
This market is only available to high net worth investors, and many brokers will ask fir detailed financial records before they allow you to open an account.
To invest in a futures contract you ill need to put up initial margin of about $2,430 at current market prices. This is called the initial margin and if your futures contract goes into a loss position you will be asked to top up your account. This is called a margin call.
A cheaper way to invest in the futures market is to purchase an options contract on a future. If you believe the underlying asset price will rise you buy a call option and if you think the price will fall you buy a put option on the underlying future contract. The benefit of a option contract is that you only risk the premium you paid to buy the option and the amount of capital tat has to be put on margin is much lower at $250.
A riskier strategy with Options is to write options contracts i.e. sell them. This opens up the investor to unlimited loss and brokers will check you have sufficient capital to cover the potential losses before they will allow you to write this contract.
Options and Futures are really only available as an investment to sophisticated investors or high net worth investors. Retail investors will be disallowed 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% rough rice ETF’s but there are a number that have a percentage allocation to rough rice.
One potential ETF the investor could choose is Elements International Commodity Index- Agriculture Total Return (RJA). This is a well diversified index that includes allocations across the following commodity types, corn, wheat, cotton, soybeans, coffee, live cattle, sugar, cocoa, lean hogs, rubber and several others, including rice).
This Powershares ETF is based on DBIQ or DB Agriculture index. This index comprises a number of commodity futures contracts within the gricultural sector. This index aims to track the underlying performance of the softs category of the commodities index. Main holdings in the Funds index are corn, soybeans, sugar, live cattle, cocoa and coffee.
The Rogers International Commodities index (RICI) Agriculture has been around tracking the softs category since December 2005. It has a 2.15% weighting in Rough Rice. To invest in this index requires you finding a broker who specialises in this index.
For the UK investor an alternative to Futures, options and ETF’s is spread betting. A number of the spread betting companies will allow you to bet on the underlying futures price as quoted on the Chicago Board of Trade. The minimum bet size is only £0.50 and an investor only requires 3250 in their account. Spread betting has many advantages over Futures and Options as the capital requirement an investor needs is much lower. This is an ideal investment in the UK as spread betting profits are tax free.