How to Invest in Rice: 5 Suggestions for the Savvy Investor


Have you ever thought about investing in rice? This article will provide 5 suggestions on how a savvy investor might get involved in this commodity market.

Until recently, the opportunity for the retail investor to invest directly in rice land would not have been possible. This possibility of direct investment would have been accessible only to investment funds.

This has all changed now as an alternative investment company has introduced an investment where the investor can invest directly in African rice farming. This investment would cost the investor £5,850 and secure 3 hectares of prime rice paddies for 49 years. The investor would earn an annual return of around 15% and benefit from capital appreciation of the land itself. If the investor were willing to hold this investment for 5 years, he could expect to achieve 287% on his initial investment.

If you want to invest in the financial markets, buying a raw rice futures contract could be the way to go. Its symbol is ZR.

The Rough Rice Futures contract is quoted at the bushel price 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 on 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 need to build up an initial margin of around $2,430 at current market prices. This is called initial margin and if your futures contract ends up in 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 futures contract. 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 advantage of an option contract is that you only risk the premium you paid to buy the option and the amount of capital to be put in margin is well below $250.

A riskier strategy with options is to write options contracts, that is, to sell them. This opens the investor up to unlimited losses and brokers will check that you have sufficient capital to cover potential losses before allowing you to write this contract.

Options and futures are only really available as an investment for sophisticated investors or wealthy investors. Retail investors will not be permitted 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 are no 100% Rough Rice ETFs, but there are a number that have a percentage allocation to Rough Rice.

A potential ETF that the investor could choose is Elements International Commodity Index – Agriculture Total Return (RJA). It is a well-diversified index that includes allocations between 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 the DBIQ or DB Agriculture index. This index includes a number of commodity futures in the agricultural sector. This index aims to replicate the underlying performance of the softs category of the commodities index. The Funds Index’s top holdings are corn, soybeans, sugar, live cattle, cocoa and coffee.

The Rogers International Commodities (RICI) Agriculture Index has tracked the agricultural commodities category since December 2005. It has a 2.15% weighting in raw rice. To invest in this index, you need to find a broker that specializes in this index.

For the UK investor, an alternative to futures, options and ETFs is spread betting. A number of 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 needs 3250 in their account. Spread betting has many advantages over futures and options because 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.

Source by Mark Skeels

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