How to Invest in Agriculture

By: Nihar Patel

Agricultural products are always in demand in a growing world population.

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Agriculture is subject to steady, though cyclical, demand. People need to eat, and the population is growing. Investing in agriculture can be simple or complicated, depending on how direct you want your exposure to be. Investing through the stock market is easy through agriculture exchange traded funds, or ETFs, which are similar to mutual funds. A more direct investment comes from the much more complex commodity futures market.

Investing Through ETFs

Step 1

Learn about the global agricultural market and how it is affected by both worldwide and local issues. Wheat, corn and soy are a few of the most heavily traded futures, and despite the global focus of the market, some crops are focused on geographic areas. Corn is an international crop, but it is heavily grown in North America, and local issues there, such as drought or an early winter, can affect the price internationally. Prices also tend to be higher earlier in the harvest season for the crop and more expensive later as the supply dwindles. If a crop is widespread in both the Northern and Southern Hemispheres, there can be a year-round harvest because the seasons are reversed. Rice is mostly a Northern Hemisphere crop that is grown extensively in East Asia and India, while sugar is grown extensively in both hemispheres. Prices of different crops can diverge based on time or specific events in the growing areas. For example, rice requires a considerable amount of water, while wheat tends to be more hardy. While the prices of both might move together during normal conditions, rice might rise higher if there is a drought. Keep in mind the political risks involved in growing countries as well. Both India and China are major producers of rice, and widespread civil unrest or poor political policy there might have an impact on the price of rice around the globe.

Step 2

Research ETFs that invest in agriculture. Reconcile the research into the specific movements of crops with the ETFs you find. You need to learn how the spot price affects the price of the ETF and the timing of movements in relation to the underlying asset. DBA is an example of a broad-based agriculture ETF that invests in many crops. CORN invests in only corn. These ETFs trade futures contracts to mimic the spot price of the crop. An individual can trade the futures themselves, but ETFs simplify the process.

Step 3

Buy the ETF you like best, but monitor it closely. Agriculture does not easily lend itself to a buy-and-hold strategy and should be watched almost daily. You should be familiar with the common causes of fluctuations, as well as being aware that unique situations, such as governmental collapse, might occur that are completely unexpected. All the research done to understand the global agricultural market should be considered when monitoring your investment.

Investing Through Commodity Futures Market

Step 1

Apply for futures-trading privileges in your broker account, or open a new account with another firm. Be aware of capital requirements, fees and any other restrictions that can differ between brokerages.

Step 2

Learn how to trade futures because they differ from stocks. There is also a different schedule. Agriculture futures are traded 17:00-14:00 Central Time Sunday to Friday. A futures contract is an actual trade that will be carried out at a certain time in the future, with the price negotiated beforehand. Those trades need to be backed by capital, and each contract is for a fixed number of units. This means substantial capital is required to trade in commodities.

Step 3

Begin trading only when you are comfortable with the process. You do not want to accidentally initiate an erroneous trade, considering how much capital can be at stake, so master the online broker interface to avoid errant trades.

Items you will need

  • Online broker account (commodities trading privileges optional)


About the Author

Nihar Patel covers finance and investing for several online publications, including Seeking Alpha. He also runs his own investment analysis website. Patel holds a J.D. from UC Hastings College of Law, as well as a bachelor's degree in political science and history from UC Davis.

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