Soft commodity trading has been gaining more interest among traders who are looking to diversify their portfolio of stocks and bonds. Commodity markets influence almost every aspect of our daily lives: from car fuel to grocery stores, commodities prices impact the global economy at every level.
What are soft commodities?
The term “soft commodities” generally refers to agricultural goods that are grown rather than extracted or mined. The softs are some of the oldest assets available to purchase and trade today, with their roots in commerce tracing back thousands of years. Truth be told, this asset class is less commonly traded than its hard counterpart. However, it still maintains a significant role in daily trading volume across global markets. Owning even the smallest percentage of soft commodities will diversify a portfolio and lead to a reduction of both volatility and risk.
Cocoa was discovered over 5,000 years ago by native Central Americans. Spain began to acquire cocoa in the 15th century and, centuries later, its popularity spread across Europe. The annual consumption of cocoa beans is thought to be around 4.5 million tonnes. The most favorable cocoa types are the US Cocoa and the UK Cocoa No 7.
More than 2,000 years ago, coffee was discovered in Ethiopia. It later found its way from Africa to the Middle East. Nowadays, coffee has one of the largest daily ranges of all the softs, making it a very volatile commodity. The most popular types of coffee traded today are Robusta Coffee, which has a higher caffeine content, and Arabica.
Since cotton has a variety of different uses, it has universal appeal and, therefore, is one of the most influential soft commodities. Discovered more than 5,000 years ago, cotton played a crucial role in the rise and fall of many nations. The Cotton No 2 is very popular among traders.
For years, orange juice was consumed fresh, because it has a relatively short shelf life and was receptive to the price shocks caused by supply disruptions. Once the freezing of orange juice came about in the 1940s, it quickly became the industry standard – making this commodity more enticing for traders.
It is commonly believed that first sugar utilisation dates back to over 2,000 years ago. Over the centuries, sugar has become one of the most common staples on every dinner table. Sugar is one of the most heavily traded commodities in the world in terms of total volume, especially US Sugar No 11 and UK Sugar No 5.
Wheat cultivation began around 9,600 B.C., and it remains a valuable commodity for the foreseeable future due to the continuously increasing demand for wheat in emerging markets. UK Wheat is popular among many traders.
How to trade soft commodities
Soft commodities trading can be done in spot and futures markets.
Spot markets are associated with real-time “spot” prices, and so can be bought or sold immediately at the spot price. Investors create the spot price by posting their sell and buy orders. The spot price may change by the second in liquid markets, as orders get filled and new ones enter the marketplace.
Alternatively, soft commodities trading can take place in futures markets. People deal with contracts to buy or sell the commodity for a specific price at some point in the future. Traders will generally rollover their positions or close them out early in order to gain profits.
If commodities are traded with futures, a much greater potential for significant volatility and risk arises. Large fluctuations can price occur, as it is generally difficult for traders to accurately predict the future market price.
Trading soft spot commodities (e.g. Spot Wheat) is the preferred strategy of many traders. You can hold your position for as long as you want, since spot positions do not have an expiry date.
This can be done through CFDs (contracts for difference), a derivative product with an agreement (usually between a broker and a trader) to pay the difference in the price of an underlying asset between the start and finish of that contract. An undeniable advantage of CFDs is that traders get exposure to soft commodities market without purchasing options, shares, futures, or ETFs. However, since CFDs are a leveraged product, the risk of losing is amplified.
With Capital.com, you can trade Soft Spot Commodities CFDs, which provide greater liquidity and more exposure with a smaller initial deposit.