So if the price of rice doubles in the next two years....

Discussion in 'Stocks' started by let it run, Aug 14, 2006.

  1. ... what stocks are worth buying in order to capitalise on this?

    Also, what exchange are rice futures traded on? I'm assuming there are different grades of the stuff too...

    I'm not about to jump in on anything, just puting the feelers out.
  2. Maybe buy Uncle Bens
  3. CBOT has a rough rice contract. I think the main rice contracts are traded on the asian exchanges.
  4. Couple of assumptions in the background that needs to be examined first before we can look into making a profit on rice.

    1. "Cost of raw materials results in improved company earnings" may not really be true. In the cases of raw materials costs increasing, most companies would just pass on this extra cost to their customers as a price-increase in the final product. An increase in the low-cost raw materials may not even affect final pricing that much as most of the costs will have been in transport, processing, storage, marketing and packaging. Actual net earnings probably wouldn't change by much; it might actually be more sensitive to demand and consumption than actual raw-materials costs.

    2. "Company earnings relate to stock-price increase" is hardly a 1:1 relationship. It may have been more related back when companies were paying out 30-40% of their profits in dividends. Good luck finding even 2-3% today. What really determines the price of a company's stock is what the next guy's willing to pay you for that stock. Earnings is at least one level removed from the stock price in that it may be but one out of many factors that the next buyer is considering. Other things may include anticipation of future pricing, liquidity, cost/share, product appeal/uniqueness/bling, phase of the moon, etc.

    Good example to illustrate the fallacies of the above assumptions would be wooden furniture. I see a block of wood carved into a semi-useful shape and I'll offer $100 for it as that's what it's worth to me as a desk. Slightly more than $40/cord as firewood. Another person might see it as "antique" for its nice finish and pay $600 for it. The actual $25 cost of raw-materials really has nothing to do with what the next guy will pay you for that item.

    With that out of the way, here's the cost of rough-rice.


    The trading-range for the past year is about 20%. I highly doubt that rice will change by more than 100%. Let's say it makes double this year's move the next year and increases by 40% to 13.5.

    As outlined earlier, it's doubtful that companies dealing with rice will show much of a change in their bottom-line or profitability or stock-appreciation from the cost of rice.

    One way to profit from this is to buy the futures outright. With about 35:1 leverage, you can make a 1500% return on this contract. Or you can also lose -1500% as well if rice drops by 40%

    A safer way to play that is to buy rice-futures options. The most you can lose is the cost of the option itself, 100%, but the gains can be almost as high as the futures, although timing makes a bigger difference. For example, just before the recent spike in RR prices on 9-aug, the Sep-9.4 calls on RR was about $40. After the jump, they're now going for $690. There's your 1500% return right there in a matter of days.

    The risk to rewards ratio is even with futures -1500% to +1500% while with options it's -100:+1500%. Of course, this kind of a spike in options is very unusual and rare so your actual returns will most likely be less with options than futures.