What Is a Soft Commodity?

A soft commodity refers to futures contracts in which real values ​​are cultivated and not mined or mined. Soft commodities are among the oldest types of futures contracts known to be actively traded. This group of agricultural products can include products such as soybeans, cocoa, coffee, cotton, sugar, rice and wheat, and all kinds of farm animals foreign exchange market today. Soft raw materials are sometimes called tropical raw materials or fiber and food raw materials.


Understand Soft Commodity

Agricultural commodities play an important role in the futures market and are used both by farmers who want to set future prices for their crops and by speculative investors who want to make a profit. Due to uncertainties in weather, pathogens, and other risks associated with agriculture, commodity futures tend to be more volatile than other futures forex trading platforms in India. For example, weather and the seed/harvest ratio can cause large fluctuations in the prices of grains and oilseeds, which have different effects on contract values ​​depending on the delivery date.

Soft Commodities vs. Hard Commodities

Soft raw materials are less defined than hard ones. Soft raw materials are best understood as natural raw materials. Coffee, cocoa, orange juice, sugar, rapeseed, corn, wood, wheat, lean pork, cattle feed, etc. They go through a growth cycle that ends with harvest, usually for further processing. This is in contrast to hard raw materials such as mined metals (copper, gold, silver, etc.) and energy production (crude oil, natural gas, and their refined products) that are mined from the ground instead of planting and until they are cared for until their maturity.  Hard raw materials are also found in similar geological deposits around the world, while soft raw materials depend on regional climatic conditions for their growth.


Alternative Classifications of Soft Commodities

In the absence of a definitive list of what a soft product is and is not, alternative classifications have emerged. Agricultural products are sometimes used to refer to meat, livestock, grains, and oilseeds; Leave the cocoa, orange juice, etc. in the category of soft raw materials. This is not always a good solution, as wood is classified in one category or another, creating an agriculture and forestry category or a grouping of consumer goods, food, and fibers. For example, the CME group only lists coffee, sugar, cocoa, and cotton futures as commodities in the broader category of agricultural futures best broker in India for forex.1 The Intercontinental Exchange (ICE), on the other hand, lists cocoa, coffee, sugar, cotton, and orange juice with additional grains and agricultural products in the commodity category. Due to their volatility and different supply and demand cycles, soft commodities can be more difficult to trade than hard commodities. As with any derivatives business, investors need to understand the market they are entering and the implications of the contract they are using to enter before risking real money.

Trading Soft Commodities are

Cocoa

Cocoa is traded in dollars per ton and a contract is for 10 tons. So if cocoa costs 1,500 USD / month. The total value of the contract is $ 15,000 and the markets are moving at $ 1,555 / lb, a move of $ 550 ($ 1,555 - $ 1,500 = $ 55 and 55 x 10 million tons = $ 550). The minimum price movement or tick size is one dollar or $ 10 per contract. Although the market often trades in sizes greater than a dollar, a dollar is the smallest amount you can move.

Coffee

Coffee is marketed for pennies a pound. A coffee contract controls 37,500 pounds of coffee.4 If the price of coffee is trading at $ 1 / pound, the present value of that contract is $ 37,500 ($ 1.00 x $ 37,500 = $ 37,500). The tick size is 5 cents per pound or $ 18.75 per tick.4 For example, if a trader took a long position at $ 1.1000 and the markets rose to $ 1.1550, he would have made a profit of $ 2,062.50 ($ 1.1550 -). $ 1.1000 =). $ 0.0550 and $ 0.0550 x 37,500 = $ 2,062.50.

Cotton

Cotton is the subject of contracts for 50,000 pounds. It is also quoted in cents per pound. So if the market is trading at 53 cents a pound, the contract is worth $ 26,500 ($ 0.53 x 50,000 = $ 26,500). cotton equals a profit or loss of $ 1,000. When the price of cotton exceeds 95 cents per pound, the minimum tick movement is extended to $ 0.0005 to allow for higher daily margins.

Sugar

Sugar trading contracts sometimes called "Sugar # 11" that represent 112,000 pounds of sugar and are expressed in cents per pound.7 If the futures price is $ 0.1045, the contract is worth $ 11,704 ($ 0.1045). / lb x 112,000 pounds = $ 11,704. If the market goes from $ 0.1000 to $ 0.1240, that equates to a dollar move of $ 2.688. The minimum price movement for sugar is $ 0.0001 or $ 11.20 per contract.

Contact us