Trading Guides

How To Trade Soft Commodities

May 26, 2023

Soft commodities are the essential assets that underpin much of the global economy and are crucial to human sustenance and survival. They are also some of the oldest materials to be bought, sold and traded for, dating back centuries. 

Today, the soft commodities market is more sophisticated than the marketplaces and merchant bartering that once existed, and their high liquidity and the importance of their availability offer traders many opportunities to make profitable trades in global markets. 

In this article, we’ll define exactly what soft commodities are and how you can trade soft commodities both directly and through the use of financial derivative products. We’ll also discuss what factors can affect the price of a soft commodity and how to manage a portfolio that includes soft commodities.   

What are soft commodities?

Soft commodities are natural products that we cultivate and use for food sources, in construction, for the production of consumable goods and for other human activities. They are products of the earth but require human labour to produce them as goods that can be bought and sold. They are also known simply as ‘softs’.

Examples of soft commodities

Soft commodities vary greatly and are produced in different geographic regions all across the world, depending on the conditions that are most favourable for their production. However, they’re grouped together because they are required for human survival and are all natural materials that can then be refined or processed to produce other goods. 

Some examples of soft commodities are:

  • Coffee beans
  • Wheat 
  • Cocoa 
  • Sugar
  • Rough rice
  • Palm and kernel oil
  • Cotton
  • Hogs
  • Soybeans
  • Live cattle
  • Oat
  • Corn
  • Lumber

Because soft commodities may be sourced from all across the world, issues like weather, supply chain disruptions and economic instability can all affect their price, creating opportunities for traders to speculate on their price movements in the short and long term. 

What are hard commodities?

In order to understand what commodities are, it’s helpful to know the distinction between hard and soft commodities. Unlike soft commodities, which are natural products but must be planted, grown, raised or otherwise cultivated, hard commodities are drilled or mined from the earth and are used in their raw extracted form. They are finite natural resources like crude oil and natural gas, as well as renewable energies like solar, hydro, wind and geothermal power. 

What affects the price of soft commodities?

Because soft commodities are products of the natural world, they are affected by both natural and man-made factors. Some of these include:

  • Weather Weather is, of course, a large determining factor in the price of any soft commodity. Good weather conditions are required for harvests and yields to meet their expected levels to meet supply, but extremely favourable weather conditions can actually lead to a problem of oversupply, which can cause a soft commodity’s price to drop significantly.
  • Consumer demand  At the other end of the spectrum is the issue of demand. As consumer habits change, soft commodities can fall in or out of favour, affecting their price. For example, a rise in foodie culture has made consumers more aware of the types of cocoa beans: Forastero, Criollo and Trinitario and their different flavour profiles. As consumers become more invested in the subtle taste differences between chocolate produced with different cocoa beans, this can affect price.
  • Political instability Political instability and the threat of conflict can disrupt both the production of soft commodities and the ease with which they can be traded to meet demand. The recent war in Ukraine, for example, has impacted the price of grains like wheat.
  • Supply chain disruptions Increased transport costs, instability in developing nations and other supply chain issues can affect the flow of soft commodities into markets and thus drive their price up because of scarcity.
  • Climate change Unsurprisingly, commodities that are planted, grown and harvested or cultivated on the land are particularly vulnerable to issues of climate change. This could include issues of poor soil quality, natural disasters, changes to traditionally tropical or temperate climate zones and flood or drought periods.
  • Labour issues  Labour issues in supply countries can also have a major impact on the price of certain soft commodities. If a sudden development in legislation leads to higher or lower wages for workers, this will have a knock-on effect on the price of the raw material they harvest or raise.
  • Government regulations — National governments may impose quotas on the amount of commodities they produce that can be made available to certain markets. If government regulations or even sanctions prevent one country’s supply from meeting demand in a certain market, this will have consequences for the value of assets produced elsewhere.
  • Seasonality All soft commodities are governed by seasonality, and depending on where in the world they are harvested and how long the season is, prices will rise and fall according to this seasonal cycle.
  • Global development As parts of the world rapidly develop and experience population growth, new markets emerge that demand soft commodities to meet their needs. Especially in the long term, this global development has the potential to dramatically reshape balances of supply and demands. 

Why trade soft commodity markets?

Because soft commodities are needed by human beings all over the world, their fluctuations in availability offer some serious opportunities for traders to make a profit. Agricultural products are by their nature vulnerable to many forces and unpredictable, which offers both increased risk and increased rewards. Not all traders want to take on that risk, but for those who relish the challenge of a volatile market, trading soft commodities is a good way to maximise lucrative opportunities.

In the more sophisticated markets of the present, much of the soft commodities trade isn’t conducted by buying and selling the actual assets at on the spot prices but is instead by being traded on a futures market. Futures are legally binding contracts that set a fixed price for soft commodities, to be paid on a later date agreed to by both buyer and seller. Originally a method to help farmers and the agricultural industry to lock in favourable prices during non-peak periods, futures are today part of a larger, more complex trading ecosystem.

While futures entail an eventual delivery of assets, many traders offset futures prior to delivery, using the instrument as a way to speculate on predicted price movements, rather than the value of the underlying asset itself.

How do you trade soft commodities?

Trading soft commodities through futures is a high-risk endeavour. Futures contracts are traded on leverage, which means that traders only put up a percentage margin of the asset’s full value, but that both profits and losses are calculated on the total price. If you make a successful prediction on prices movements, you could offset your soft commodities future having taken magnified profits, but if an unpredictable factor causes the commodity to suddenly move in price, your losses, once calculated on the full position price, could far outpace your initial outlay.

For this reason, it’s important to have risk management strategies in place before you start trading soft commodities. Tools like stop-loss orders can help you to mitigate risk by automatically closing out positions that reach an amount you can’t afford. Deciding whether you want to go long or short when trading soft commodities is also important when choosing a strategy that you’ll implement. 

You can test out the waters first with a demo account. Then, when you’re ready to start trading soft commodities for real, you’ll need to set up a live trading account in order to open your first position. VT Markets makes this process easy and instantly connects you with over a thousand financial instruments in an institutional-grade environment.

Every soft commodity is slightly different in terms of production methods, geographical sources of supply, potential vulnerabilities and consumer behaviour. If you have an interest in a particular soft commodity — for example, if you want to learn how to trade coffee — it’s worth taking a look at our in-depth guides that examine these specific markets more closely. 

Start trading soft commodities today with VT Markets

At VT Markets, we make the process of trading soft commodities easy and lightning fast. Not only does our powerful trading platform give you the option to trade soft commodities of all types, but we also give clients trading tools, expert advisor access, daily market analysis and excellent support to help you manage and grow your portfolio. Talk to us today about opening your live account and seizing the right opportunities in soft commodities markets. 

FAQs

How do I start trading soft commodities?

In order to start trading soft commodities, you’ll need to decide which asset you’re interested in trading and how you would like to carry out those trades.

Once you’ve selected an asset you’re interested in, the next step is to choose which financial product you’d like to trade with and on which exchange. Soft commodities can be traded on the Intercontinental Exchange, the Chicago Board of Trade and the Kansas Board of Trade. However, traders can also choose to trade soft commodities through over-the-counter products (OTCs) through a broker like VT Markets. 

At VT Markets, you can gain exposure to soft commodities markets through leveraged trading while taking advantage of our powerful trading platform MetaTrader4 and its newest iteration, MetaTrader 5. We also provide all of our clients with access to trading tools, expert analysis, transparent pricing charts and forex signals, so you can monitor the market and seize the right opportunity when it comes. 

What’s the difference between hard commodities and soft commodities?

All commodities are physical materials and resources that are required for the production of food, energy, construction, technology, heating and transportation — just about every human activity. These are the raw materials that underpin the global economy, and they are the oldest forms of assets that were traded by human civilisations, going back hundreds of years.
Commodities are divided into two categories; hard and soft. Hard commodities are natural resources that are mined or otherwise extracted from the earth. They include precious metals like gold and silver, base metals like copper, nickel and cobalt, energies like crude oil and natural gas and renewables like solar power. Hard commodities are traded in their raw material form and come directly from the earth, while soft commodities require labour in order to grow or raise them. Soft commodities are in general less valuable per unit than hard commodities, but the role they play in everyday sustenance makes them very liquid and therefore profitable markets to trade in.

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