Ultimate Guide to Investing in Wheat
Most investors probably aren’t looking for the ultimate guide to investing in wheat, but there is a reason they should. Investing in agriculture is relatively solid in the long run. Everybody needs to eat, and all of the things people eat come from the farm. Nobody thinks of that when there walking through the grocery store, but commodities are one of the lifeblood of the economy. Regardless of whether the economy itself is up or down, things like wheat are necessary and always being processed for bread and many of the other food products consumers purchase.
Here’s the thing. There aren’t any publicly traded companies that deal strictly in wheat. It’s not as simple as just finding a big bread maker or cereal maker and calling it a day. Other commodities like whisky do offer that opportunity, but that didn’t happen overnight either.
Let’s discuss how the average investor can get a piece of the wheat industry and why it might be a good idea to do so.
Investing in Wheat Means Investing in Agriculture
Investing in wheat means investing in agribusinesses. As mentioned, there isn’t really a single company that only deals in wheat, but that doesn’t mean it’s not possible to buy wheat by itself. We’ll discuss that more and a little bit. It’s important to explore investing in wheat from every angle because wheat is the most traded commodity at the Chicago Board of Trade.
Here are some of the best agribusinesses to invest in not only for the rest of this year, but heading into 2020.
Mosaic has only been around for 15 years but it’s the largest American producer of potash and phosphate fertilizer. The company mines and produces both products and markets them internationally across 50 different countries. The current demand for fertilizer products is rising across the globe especially as prices for nitrogen and phosphate increase. Mosaic is a good value stock to own.
Bunge is into a little bit more of a diverse range of businesses including: agribusiness, sugar, bioenergy, fertilizer, milling products and edible oil products. The company’s core business is processing, storing, transporting and selling a wide variety of agricultural products including wheat.
The company experienced a 5.9% annual increase in earnings this year and the stock prices targeted at an average of $83 per share according to analysts. It’s currently trading at just $55. The optimistic price target is based on the fact that analysts expect earnings to jump more than 10% year-over-year over the next five years as demand for Bunge’s products increases.
Arch Daniels Midland Company
Of the companies we’re featuring in this post, Arch Daniels Midland Company has undoubtedly been around the longest. The company was founded in 1898. Talk about stability. It’s a multinational company that markets and produces agricultural commodities. ADM owns more than 600 different facilities related to the procurement of crops and processing all around the world. The company also provides transportation services, insurance and trade financing. To say the least its business operations are well diversified providing the company multiple streams of revenue. The stock prices up 25% this year and investors get paid a dividend of more than 2.6%. The company’s market capitalization of over $28 billion makes it one of the larger agribusinesses publicly traded on the stock market today.
Investing in Wheat through Futures Contracts
The best thing an investor can do to invest in wheat and nothing else if they don’t want any other part of an agribusiness is to invest in futures contracts. Betting on the future price of a commodity is a very common thing and just like any other form of investing comes with its share of risks. If the supply of wheat goes down and demand goes up, the investor wins. If the reverse happens, it can mean significant losses.
Investing in futures contracts is in for the faint of heart and the average investor probably doesn’t know that much about agriculture. Of course the best investment strategy overall is to think about the long term and invest in a diversified portfolio that includes not just different companies but companies from different sectors, and also different types of investments not just stocks.
ETFs That Include Wheat
Another option that sort of falls in between investing in agribusinesses and dabbling into futures contracts would be to buy ETF’s or exchange traded funds. These funds will always include more than just wheat because the whole point of an exchange traded fund is to give the investor exposure to a combination of goods or services within one industry or category. An ETF that includes exposure to wheat, likely includes corn, soybeans and other commodities as well.
How to Trade Futures Contracts
In order to trade wheat using futures contracts, investors need to open an account with a commodity futures broker that is registered with the National Futures Association in the United States. Commodities brokers will help check prices and place trades, but of course they will take a fee for their services.
Other Tips for Trading Futures Contracts
It’s important to understand the effect that leverage can have on futures contracts. Using leverage means borrowing money to try to amplify gains. It’s a strategy that can be used with any kind of investment in grains, including futures contracts. While the prospect of amplifying gains is certainly attractive, borrowing money to invest can also result in significant losses.
Still it’s important to note that a grain futures contract can be traded using a minimum margin deposit of 5 to 10% of a given contract’s total value. Investors willing to risk that 10% can potentially make or lose 10 times the value of the contract in the long run. That’s why leveraging can be a high risk, high reward kind of strategy.
Choose ETFs Wisely
Two key ETFs give investors exposure to wheat. They include the iPath Dow Jones-UBS Grains Subindex Total Return ETF (symbol JJG) and the ELEMENTS Exchange Traded Notes MLCX Grains Index-Total Return (GRU). It doesn’t mean there aren’t others but these ones offer a good mix of different grains. Again, anybody choosing to invest in an ETF is going beyond just wheat, but for the average investor diversity is important so it’s not a bad thing to have access to more than one commodity in a given fund.
Other Commodities worth Investing
If investing in wheat is no longer an attractive proposition after reading this post, the good news is there are many other options for investing in commodities and making money. At the end of the day the value of something is dictated by supply and demand, so the principles of investing are always the same but some investors feel more comfortable with certain commodities over others.
The one tried, tested and true commodity that virtually anybody would take a look at especially during times of economic crisis is gold. There are many ways to get involved in the gold game. One can buy jewelry, invest in gold bars (or gold Boolean as it’s called), bind to companies that mine gold on the stock market or purchase a gold certificate from a bank.
Another option is to invest in digital gold, also known as Bitcoin. Investing in cryptocurrencies in general is certainly a riskier proposition, but exposing a small portion of one’s portfolio might be a good idea depending on the individual and the long-term goals and investor has.
Speaking of long-term goals, it’s possible to trade both physical gold and digital gold in an IRA. Saving for a rainy day or the really long term is certainly sure to level out risk a little bit. This is especially important to consider with cryptocurrencies because they can fluctuate 40 or 50% in one day.
Whatever investors decide to do, it’s important to set both short-term and long-term goals. Making commodities part of any investment portfolio has to be a conscious, well thought out decision. The rewards of investing in the sector can certainly be fruitful, but as always risk and reward are always linked.