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 mutual funds.
All that has now changed, as an alternative investment company has introduced an investment in which the investor can invest directly in the African rice lands. This investment would cost the investor £ 5,850 and guarantee 3 hectares of premium rice land for 49 years. The investor would earn an annual return of around 15% and benefit from capital appreciation on the land itself. If the investor were willing to hold this investment for 5 years, he could expect to reach 287% of his initial investment.
If you want to invest in the financial markets, purchasing a Rough Rice futures contract could be the way to go. Its symbol is ZR.
The raw 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 2000. They are traded on the Chicago Board of Trade 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 you for detailed financial records before allowing you to open an account.
To invest in a futures contract, you will need to put an initial margin of approximately $ 2,430 at current market prices. This is called initial margin and if your futures contract enters a losing 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 buy an options contract on a future. If you think the price of the underlying asset will rise, you buy a call option, and if you think the price will go down, you buy a put option on the underlying future 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 placed on the margin is much less, $ 250.
A riskier strategy with options is to enter into options contracts, that is, to sell them. This opens the investor to unlimited losses and brokers will check that they have enough capital to cover potential losses before they allow them to write this contract.
Options and futures are only available as an investment for sophisticated investors or high net worth investors. Retail investors will not be able to participate in these markets by their own country’s financial regulator.
The retail investor can invest in rice by investing in an exchange-traded fund. There is no 100% raw rice ETF, but there is a number that has a percentage allocation to raw rice.
One 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 types of commodities, 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 various commodity futures contracts within the agricultural sector. This index is intended to track the underlying performance of the soft category of the commodity index. The main holdings in the Funds index are corn, soybeans, sugar, live cattle, cocoa and coffee.
The Rogers International Commodity Index (RICI) for agriculture has been tracking the soft commodities category since December 2005. It has a 2.15% weight on raw 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 differential bets. Several of the margin betting companies will allow you to bet on the underlying futures price as traded on the Chicago Board of Trade. The minimum bet size is only € 0.50 and an investor only requires 3,250 on their account. Differentiated bets have many advantages over futures and options, as the capital requirement for an investor is much lower. This is an ideal investment in the UK as the benefits of differential betting are tax free.