According to commodity trader — Rowan Relton, soft commodities are one of the older assets that are being traded but not as much as hard commodities. Agricultural products such as coffee, cotton, sugar, wheat, soybeans, rice, and different types of livestock are grouped under soft commodities.
The soft commodities market comprises all the agricultural products groups under soft commodities and is not a market for everyone due to the risk involved. Commodity markets affect every area of our lives daily and the global economy at large. Many traders that want to diversify their portfolio of bonds and stocks have been considering soft commodity trading.
Soft commodities play a very important role in the futures market. Futures contracts are used by farmers to lock in the future price of their products and traders that want to make a profit. The uncertainties of pathogens, weather, and other risks involved in soft commodities make it more volatile than other futures. Seeding/harvesting reports and weather can significantly affect the price of grain and oilseeds and as a result, impacting contracts value based on the delivery dates.
Today, Rowan Relton will discuss more about the soft commodities trading.
How to Trade Soft Commodities
Soft commodities trading in the physical market includes the growing and selling of commodities in their normal form after undoing primary processing. Normally traders specialize in a certain soft commodity and markets from which they can sell to and buy from. Soft commodities trading can be done both in future and spot markets.
Soft commodities trading can be done in future markets where people make use of futures contracts to buy or sell commodities at a certain price and time in the future, Rowan Relton says. So traders can decide either to hold their positions or release them early to make a profit. Commodities traded with futures are more volatile and at higher risk, because there can be huge fluctuations in price. Reason being that it is quite difficult for traders to make a precise prediction of the future market price.
Spot markets have to do with real-time prices, which means one can buy and sell instantly at the spot (real-time) price. In spot markets, the investors make the spot price once they post their buy and sell orders. The moment orders are made and there is a new one in the market, the spot price can change. Spot positions have no expiry date therefore one can hold the position for long which is why some traders prefer trading soft spot commodities like spot wheat. Contracts for different (CFDs) make it possible for traders to hold their position for long. An acquired product with an agreement between the trader and broker to pay for any difference in price from the beginning of the contract till the end. The fact that traders are exposed to the soft commodities market without buying ETFs, shares, options and futures is one of the benefits of contract for difference (CFDs).
Some Soft Commodities That Can Be Traded
Sugar: sugar is made from a processing sugar cane and is traded in a contract that represents 112,000 pounds of sugar. This is expressed in cents per pound. The minimum price movement of sugar is around $0.0001 per contract. Sugar cane grows better in tropical areas and one of the largest exporters and producers of sugarcane is Brazil. The countries with the largest importation of sugar cane are the U.S.A, European Union, Malaysia and China. The raw product that is extracted from sugar cane is raw sugar. The harvested sugar is crushed to get raw juice. Refined sugar is generally known as white sugar is purified sugar and is what consumers mostly use.
Coffee: coffee is said to be one the most traded soft commodities and is traded in cents per pound. A contract of coffee is about 37,500 pounds of coffee. It is the second-largest export in the world in value after oil. For coffee to grow it needs a subtropical climate. 30% of the world’s coffee exports are produced in Brazil. Arabica, Green and Robusta are the most traded coffee types.
Cotton: is a soft commodity that is in high demand by textile companies for its use in clothing. Cotton trading focuses on the distribution of the varieties and grades of cotton such as upland, short-staple, Pima, and long-staple cotton.
Cocoa: cocoa trading is in dollars per metric ton with one contract at 10 metric tons and is grown in a tropical and humid climate. Indonesia, West Africa, Ecuador, and Brazil are the main producers of cocoa. The purest form of chocolate is the bean which is usually processed. Derivatives from cocoa include cocoa butter, cocoa powder, and more.
To profitably trade soft commodities you need to do proper market research, understand the market, and know the type of contracts to use, says Rowan Relton. A soft future contract is a legal agreement for delivering soft commodities at an agreed price in the future.