Soft commodities and all you need to know about them
Soft commodities are highly popular with traders but what do they cover and why should you look at them? Find out everything you need to know about these commodities and whether trading them makes sense.
What are soft commodities?
These can be described as agricultural commodities, as they are things that can be grown, reared or cultivated. This means that they include crops like wheat and corn, as well as things such as sugar and coffee that can be harvested. Other products on this list include meat and dairy products.
These are commodities that are produced and consumed in many different countries of the world, although each commodity has key areas of production and consumption for you to be aware of.
This contrasts with hard commodities, which are products that are mined or extracted from the Earth in some way. So this list has things like crude oil, coal, natural gas, gold and silver on it. Commodities trading can be carried out on both hard and soft commodities, but their different properties and markets mean that the same strategies may not be equally effective in both cases.
Why trade soft commodities?
There are a number of reasons that people trade commodities, with one of the main ones being to diversify their portfolio. Commodities aren’t directly linked to stocks, so if the stock market tumbles the demand for these goods won’t automatically be affected.
Since these commodities' prices are heavily affected by supply and demand, it can also provide the opportunity to make a profit if there are any possible issues that the trader is aware of. Adverse weather, over-production and other factors can lead to prices rising or falling, which opens up the possibility for traders to take advantage.
Researching soft commodity news and information is relatively easy, since these products are so important to so many people and any major, newsworthy information is generally widely reported. However, you should bear in mind that there are various factors that affect the price of each of these materials, so working out possible changes to their value can be a complex matter.
What we should know before trading soft commodities
Each market has its own risks and opportunities to be explored. The coffee market isn’t the same as the cotton or sugar markets, for example. Therefore, it’s important to do research on issues that could affect the price in the future.
For example, what will happen if a country is hugely expanding its cocoa production or if corn is likely to be in short supply because of workforce issues in a country that produces large quantities of it? You might also find that the global market is expanding for products like soybeans or wheat, leading to rapidly rising commodities prices until a greater level of supply is obtained.
Therefore, the general principles are common to many of these agricultural commodities, but they need to be investigated in each case. A look at the historical price charts for a commodity you’re interested in will reveal how volatile price has been, and will also let you see more clearly what social, political and economic factors tend to have the most effect on it.
How do soft commodity CFDs help you navigate the crises in the markets?
There are some very good reasons why traders turn to commodity CFDs in times of financial turmoil. For a start, they can be used to hedge positions in commodities against exposure in the cash (spot) market.
Another reason for this is to take up a position in the commodity market without buying the underlying asset. This means that there is no need to worry about physical issues such as storage or transportation of the product, but you can still look to profit from any change in its price.
We should take into account that some commodities have no correlation with stocks, and others have a negative correlation. This means that we expect to see their prices increase when the stock market declines. When there is fear of a bear market on stocks, commodities trading can provide some extra peace of mind.
They can also be used to speculate on future trends in the commodities markets. For instance, if a trader has a good reason to believe the price of a certain product is going to either rise or fall, the use of CFDs allows them to attempt to gain from this.
Benefits of trading soft commodities
- One of the key benefits of trading soft commodities CFDs is that you can do so with leverage, which highly increases the level of risk but also provides the opportunity of earning larger profits.
- Supply and demand are key factors in this market, and this is an area where you can research to make more informed decisions.
- Portfolio diversity is an important benefit for many investors who don’t want to limit themselves to stock or some other individual type of investment. Agricultural commodities instantly diversify any portfolio by adding widely-used products with a global market.
- Market liquidity is also a positive point in this case, as these are huge, global markets for products that are constantly in demand.
- Soft commodity trading also helps to protect you against inflation, as it will typically rise in line with inflation.
- Short and long positions can be taken in this market, to further protect you from any kind of changes in the market.
If you want to find out more about how to trade soft commodities, you might like to start by doing more research on the subject. Our guide covering trading soft commodities with Skilling gets you off to a great start by providing everything you need to feel more confident.
Not investment advice.
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