International agricultural and food markets have witnessed a dramatic shift over the last decade, bringing both domestic and international markets closer. Trade in the agro-food sector has grown exponentially as world markets respond to a more rules-based market environment. Other measures such as falling tariffs, reductions in trade-distorting producer support, and a bunch of other factors have made agricultural products important, especially from a trader and investor standpoint.
With that being said, some of the commonly traded agricultural products include Rubber, Soybeans, Sugar, and Wheat. Each of these commodities has its own advantages and disadvantages.
Why should you trade rubber?
The main way traders can invest in rubber is by speculating on rubber prices. This can be done in several ways which include buying stocks in companies dedicated to the manufacturing of rubber, trading rubber futures, or trading rubber ETFs.
Trading rubber has many pros, such as the following:
- It allows you to bet on crude oil. Traditionally, an increase in crude oil prices has a direct relationship with an increase in rubber. As crude oil prices rise, people prefer natural rubber compared to synthetic rubber.
- It allows you to bet on Automobile Demand. By investing in rubber, you can easily bet on surging demand from the automobile sector in emerging economies such as those of China and India. If rates remain near at historically low levels, the demand for cars increases, which in turn increases the demand for rubber.
- It allows you to bet on a weak dollar. Since rubber is priced in US Dollars, the health of the U.S. economy can have a direct effect on its price. Additionally, a weak dollar could result in inflation concerns. The price of rubber usually benefits from inflation as there is a limited supply of rubber trees.
Risk of trading rubber
There are three major risks you can face trading rubber:
- Global economic or political issues. Any global economic or political news that can positively impact the U.S. Dollar could force rubber prices to plummet.
- Sustained price falls for crude oil. Synthetic rubber prices decrease when there is a sustained fall in crude oil prices. This could also increase the demand for natural rubber.
- Interest rate spike. Any increase in the global interest rate or a global recession could decrease automobile demand which in turn will have a negative effect on rubber prices.
Why should you trade soybeans?
The main reasons why you should trade soybeans include betting on demand growth, portfolio diversification, and hedging against as a weak U.S. dollar.
Here are the reasons:
- Serving as a hedge on inflation and the weak U.S. dollar. The price of soybeans is in U.S. dollars, and thus the U.S. economy plays a key role in its pricing. The US Federal bank has kept the dollar weak by implementing some easy-money policies. Central bankers are expected to continue with the policies that support consumer spending and borrowing. Alternatively, a weak dollar bolsters soybean prices.
- Emerging Markets. Soybean demand can grow thanks to the development of emerging economies in the world. The demand for soybean oils, soy food, and livestock feed is expected to see a substantial increase in the near future.
Risks of trading soybeans
Although the soybeans may look excessively attractive after you learn about their advantages, there are still some risks you face with them:
- U.S. dollar risk. There’s always the risk of a strong performing U.S. Dollar, driving soybean prices down.
- Health News. Less than favorable news relating to health could weaken the demand for soy products.
- Overproduction. Prices of soybean can be depressed due to overproduction by large suppliers.
Why should you trade sugar?
You can trade sugar for almost all of the reasons you would trade the above commodities, which include speculation and betting on emerging markets:
- Speculation. Sugar is produced by a handful of countries, with weather patterns playing a key role in determining supply levels. The price of sugar can be very volatile, which can entice investors looking to speculate on short-term bottlenecks in supply.
- Diversification. Sugar has had a historically low correlation with bonds, stocks, and other financial assets, which could provide an ideal way to diversify your portfolio.
Risks of trading Sugar
The risks you may face trading sugar are the following:
- Volatility. Sugar is very volatile in nature, and its price could decrease without any clear catalyst.
- Substitutes. Substitute products for sugar, such as stevia and aspartame, could decrease sugar’s market demand.
- Subsidies. If the government increases subsidies on sugar, it can result in an oversupply, which could dwarf sugar demand.
- Obesity. Sugar demand has seen some decrease due to increasing concerns about a global obesity epidemic.
Why should you trade wheat?
You can trade wheat for either portfolio diversification, to speculate on-demand growth, or to serve as an inflation hedge.
- Speculating on-demand growth. Wheat possesses some of the positive qualities that could easily support continued growth for global demand. Unlike other agricultural commodities such as rice, it’s not as labor-intensive, making it the grain of choice in many developing countries around the world.
- Bullish traders. Bullish traders in emerging markets can consider wheat as a good trading instrument. As the consumption of meat grows in some of these emerging markets, demand for wheat will also increase as a source of animal feed.
Risks of trading Wheat
There are specific risks inherent in this commodity that you should be aware of:
- Biofuel. If the current trends in worldwide biofuel continue, a shortfall in wheat supply can be expected which will drive the price higher. This is due to farmers allocating more acreage to wheat, causing their prices to decrease.
- Federal Reserve. Fiscal measures taken by the Federal Reserve which comes along at a time when the US dollar is strong could decrease prices of wheat.
Trading in agricultural commodities, especially wheat, soybean, sugar, and rubber, all have immense benefits for traders. The most important benefit is that of diversification, as agricultural products do not have particularly strong correlations with other markets.
Traders who are interested in investing in these agricultural commodities can do so via CFDs, investing in shares of the production companies, or invest in an Exchange-traded Fund. There are numerous brokerages that allow their users to access trading in various agricultural commodities, as well as commodities in other sectors.