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In this guide we explain the main reasons why some traders choose to invest in rice, what experts think, and how to get started trading different financial instruments for rough rice.
4 Reasons You Might Invest in Rough Rice
Investors purchase agricultural commodities such as rough rice for a variety of reasons, but the following are most common: a Bet on Global Demand, Climate Change, Inflation Hedge and Portfolio Diversification.
Betting on Global Demand
Demographic trends across the globe bode well for rice consumption. Population growth in Europe and North America is stagnating, but in Africa, the Middle East and Asia, population growth is on the rise.
These regions have traditionally consumed rice as a staple in their diet. As their populations increase, their demand for affordable food sources for their citizens will increase. Rice consumption should benefit from this trend.
Speculating on Climate Change
Rising global temperatures have the potential to wreak havoc on global crop outputs. As more regions experience drought conditions, the potential for food shortages increases. Rough rice prices should benefit.
How Does Rice Act as an Inflation Hedge?
Investing in rough rice is a way to bet on higher inflation. The US Federal Reserve Bank and central banks around the world have kept interest rates low for a long time. These policies are likely to continue since they support consumer borrowing and spending.
Low interest rates have produced speculative bubbles in many assets classes, but not yet in agricultural commodities. Yet food remains the most basic and fundamental necessity. Food commodity prices could see the largest increases if the economy experiences higher inflation. Rough rice prices could benefit from these conditions.
Diversify Your Portfolio
Most traders have the vast majority of their assets in stocks and bonds. Commodities such as rough rice provide traders with a great way to diversify and reduce the overall risk of their portfolios.
Should I Invest in Rough Rice?
Rough rice competes for demand with the other agricultural commodities such as wheat and corn. Consumer preferences for one food staple over another often depend on price. As a result, the prices of many agricultural commodities are correlated with one another.
Therefore, traders wanting to hedge their bets might want to buy a basket of commodities that includes rough rice, other grains, livestock, metals, energy and other staples.
Investing in a basket of commodities that includes rough rice and other commodities can mitigate risk and diversify the composition of assets in a portfolio.
A basket of commodities can also provide protection against inflation and protect a trader from the volatility of movements in individual commodities.
Including rough rice in this basket may make sense for the following reasons:
- Emerging Market Growth: Africa, Asia and the Middle East have fast-growing countries that will have enormous food needs in the years ahead. These countries have a long history of consuming rice in their diets. As their populations grow, demand for rice may follow suit.
- Climate Change: Global warming is a positive catalyst for rough rice prices. Lower crop yields from droughts and excessive heat could boost the price of all agricultural commodities including rough rice.
- Weak Dollar: A weak US currency could be beneficial to agricultural commodities including rough rice.
However, traders should also consider the risks of investing in rough rice:
- A global economic slowdown could reduce demand for all agricultural commodities including rough rice.
- A sustained drop in the price of other agricultural commodities could siphon demand away from rough rice. While usually, such price drops are temporary, there is no guarantee that this will be the case in the future.
- Changes in consumer preferences in India and China have the potential to depress demand for rough rice. These countries may adopt more Western dietary norms in the future. This could lead to reduced demand for rice products.
What Do the Experts Think About Rice?
One agricultural economist for the United States Department of Agriculture (USDA) believes that tightening world supplies could produce higher prices in the months and years ahead. He believes that poor weather conditions combined with diminishing global stocks could end the price slide for the commodity:
You can see prices have been dropping, dropping for a while. But now we’re beginning to see tighter supplies in this country and in some other parts of the world.
Dr. Nathan Childs, USDA Economic Research Service
However, Dr. Childs is still cautious. He notes that the excessive inventory buildup will take time to work itself out. In the meantime, there is no shortage of rice:
I look at the all rice ending stocks, and, as I said earlier, we came off three years of abnormally high global ending stocks with high stocks-to-use ratios of 24 percent to 25 percent. That’s too high.
How Can I Invest in Rough Rice?
Investors have a limited number of ways to invest in rough rice:
Rough Rice Futures
The Chicago Mercantile Exchange (CME) offers a futures contract on rough rice that settles into 2,000 hundredweights, or about 91 metric tons of rough rice.
The contract trades globally on the CME Globex electronic trading platform and has expiration months of:
Futures are a derivative instrument through which traders make leveraged bets on commodity prices. If prices decline, traders must deposit additional margin in order to maintain their positions. At expiration, the contracts are physically settled by delivery of rough rice.
Investing in futures requires a high level of sophistication since factors such as storage costs and interest rates affect pricing.
Rough Rice Options on Futures
The CME offers an options contract on rough rice futures. Options are also a derivative instrument that employ leverage to invest in commodities. As with futures, options have an expiration date. However, options also have a strike price, which is the price above which the option finishes in the money.
Options buyers pay a price known as a premium to purchase contracts.
An options bet succeeds only if the price of rough rice futures rises above the strike price by an amount greater than the premium paid for the contract. Therefore, options traders must be right about the size and timing of the move in rough rice futures to profit from their trades.
Rough Rice ETFs
These financial instruments trade as shares on exchanges in the same way that stocks do. There is no ETF that offers pure-play exposure to rough rice prices. The ELEMENTS Rogers International Commodity Agricultural ETN (NYSEARCA:RJA) holds many agricultural commodities, including rice, in its portfolio.
Top 2 Agricultural ETFs/ETNs by Assets Under Management
|PowerShares DB Agriculture Fund||UBS ETRACS CMCI Agriculture Total Return ETN|
ETFs such as PowerShares DB Agriculture Fund and UBS ETRACS CMCI Agriculture Total Return ETNinvest generally in agricultural commodities, but do not necessarily hold rice in their portfolios.
Shares of Rough Rice Companies
There are no public companies that offer pure play exposure to rough rice price. However, traders that want exposure may want to consider buying shares in large agribusinesses that provide seeds, fertilizers and pesticides to farmers:
Rough Rice CFDs
One way to invest in rough rice is through the use of a contract for difference (CFD) derivative instrument. CFDs allow traders to speculate on the price of rough rice. The value of a CFD is the difference between the price of rough rice at the time of purchase and its current price.
Some regulated brokers worldwide offer CFDs on rough rice. Customers deposit funds with the broker, which serve as margin. The advantage of CFDs is that investor can have exposure to rough rice prices without having to purchase shares, ETFs, futures or options.
Where Can You Trade Rough Rice?
If you are looking to start trading rough rice and other agricultural commodities, here's a list of regulated brokers available in to consider.
Top Brokers Available in
CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. Between 72.0%-83.0% of retail investor accounts lose money when trading CFDs. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.