What are soft commodities and how do you trade them?
The commodity market can be split into two categories: hard and soft. Here, we explore soft commodities – natural products, such as wheat, cocoa and palm oil. Learn how to trade soft commodities with us.
What are soft commodities?
Soft commodities are natural, cultivated products such as sugar, wheat, corn, palm oil, soybeans, livestock and more. They’re informally referred to as ‘softs’. The key feature of soft commodities is that they’re grown (and nurtured or raised), not mined.
With soft commodities necessary for daily sustenance, their availability and lack thereof, offer an opportunity for traders and investors to speculate about their future. This is because soft commodities face many risks that affect their delivery, such as irregular weather patterns and soil degradation – which cause uncertainty in the market.
More detailed examples of soft commodities follow in the table below.
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Examples of soft commodities
| Sugar – New York No. 11 | The price of the Sugar No. 11 contract is used worldwide as the benchmark contract for raw sugar trading. The futures contracts are traded at the Intercontinental Exchange (ICE) and each contract size is 112,000 pounds. |
| Coffee – New York (Arabica) | The Coffee C futures contract is the world benchmark for Arabica coffee prices. The C market is a global commodity exchange where contract prices for physical green beans are traded from one of 20 countries’ licensed warehouses to one of several ports in the US and Europe, with stated premiums and discounts for ports and growths. |
| Cocoa – New York | The Cocoa contract is the world benchmark for the global cocoa market. The contract prices the physical delivery of exchange-grade product from a variety of African, Asian, Central and South American origins to any of five US delivery ports. |
| Wheat – Chicago | Wheat futures contracts are offered on the Chicago Board of Trade (CBOT) and serve as the industry standard for wheat prices. The CBOT wheat futures prices are quoted in dollars and cents per bushel and are traded in lot sizes of 5000 bushels (136 metric tonnes). |
| Corn | Corn futures are exchange-traded contracts on the CBOT where the price of corn is bought and sold at 5000 bushels per contract. This contract is considered the world benchmark for corn, which is commonly used for livestock and poultry feed. |
| Cotton | Cotton future contracts are traded mainly on the New York Mercantile Exchange (NYMEX) where you’ll find the benchmark for the price of cotton globally. The price of the contract is 50,000 pounds net weight, agreed upon by the buyer to take delivery, from the seller, on a specific date in the future. |
| Crude Palm Oil | Crude Palm oil futures contracts are traded at Bursa Malaysia. The contract size is 25 metric tonnes and it’s used as the benchmark price worldwide for crude palm oil trading. The two largest palm oil producers and exporters are Indonesia and Malaysia. |
| Soybean Meal | The Soybean Meal contract trades at the CBOT and each futures contract is 100 short tons, or approximately 91 metric tonnes. The commodity is traded among merchandisers, importers, farmers that tend to livestock and food processors. |
| Sugar – London No. 5 | The White Sugar futures contract is used as the global benchmark for the pricing of physical white sugar. Listed as White Sugar No. 5, the soft commodity is traded on the ICE Futures Europe exchange in London. |
| Coffee – London (Robusta) | The futures for Robusta Coffee are traded on the ICE and the contract size is 10 metric tonnes. The largest producers of coffee are in Africa, Asia and South America. |
| Cocoa – London | London Cocoa futures serve as the global benchmark for the physical price of cocoa. The cocoa is traded on the ICE and each contract is settled on 10 metric tonnes. |
| Soybeans | Soybean futures contracts are traded on the CBOT. A standard contract size is for 5000 bushels while a mini soybean contract is worth 1000 bushels. |
| Soybean Oil | Soybean oil is traded at the CBOT, with each future contract size settled at 60,000 pounds (or 27 metric tonnes). Soybean oil is commonly used to produce cooking oils and margarine. |
| LB | Lumber futures are traded at the Chicago Mercantile Exchange (CME), with each contract size settled at 110,000 board feet or approximately 260 cubic meters. |
| Orange Juice | The frozen concentrated orange juice (FCOJ) is used as a benchmark for the price of orange juice. The futures contracts are settled at 15,000 pounds of concentrated orange juice. |
| Lean Hogs | Lean Hog futures are traded on the CME. The contract size settles at 40,000 pounds (or 18 metric tonnes) of lean hogs |
| Live Cattle | Live cattle future contracts are traded on the CME. The contract size settles at 40,000 pounds (or 18 metric tonnes) of live cattle. |
| Oats | Oats futures are exchange-traded contracts where the buyer agrees to take delivery, from the seller, of a specific quantity of oats (eg. 5000 bushels or 86 metric tons) at a predetermined price on a future delivery date. The future contracts are traded CBOT, where the benchmark for the price of oats is determined. |
| Rough Rice | Rough Rice futures contracts are traded in the CME where agreements are reached for the size of 2000 hundredweights, or about 91 metric tonnes of rough rice. |
| Wheat – London | The UK Feed Wheat futures contract is recognised as the European benchmark for the pricing of physical feed wheat. It’s actively traded on the ICE Futures Europe exchange in London by merchants, exporters and many others. |
What are hard commodities?
Hard commodities are products that are mined, such as crude oil, gold and copper. The standout feature of hard commodities is that they’re found below the earth’s surface in certain geological regions. Examples include:
- Precious metals, like gold, silver and platinum
- Base metals, including copper, zinc, lead and nickel
- Energies, such as crude oil, heating oil and natural gas
Learn how to trade or invest in gold, silver and oil
Where are soft commodities traded?
Soft commodities are traded on some well-known exchanges, such as the ICE, the CBOT and the Kansas Board of Trade (KCBT). However, you don’t have to trade soft commodities directly on a formal exchange – you can trade them over the counter (OTC) with us. This means you can trade commodities listed on several exchanges, in one place.
When trading OTC, you’ll use a broker, like us, to execute your trades – which often means more opportunities, but it also has unique risks.
With us, you can choose to trade commodities on the spot, on our undated market, or via options and futures. Trading on the spot means your trade will be executed immediately, at the current market price. Options and futures enable you to trade soft commodities at a specific date and a specific price in the future.
Why trade soft commodity markets?
There are a number of reasons why people choose to trade soft commodity markets. First, it’s important to understand that this specific sector is very volatile, as agricultural production is notoriously unpredictable. Traders who prefer high-risk markets, often choose soft commodities because their price fluctuations could present more trading opportunities.
However, its volatile nature also means soft commodities carry high risk. An unfavourable weather event – like heavy rains or a drought, for example – can cause havoc on soft commodities, causing drastic price changes in a short period of time. Further, changes to import and export volumes can also directly affect soft commodity prices.
A more recent example of the volatile nature of soft commodities can be seen in the effect of the Ukraine-Russia war. Corn prices increased rapidly, partly due to the fact that Ukrainian corn crops were 54% smaller than in 2021 – restricting supply.1
Trading soft commodities on leverage only amplifies the risk. You should always take appropriate risk management steps when opening a position using derivatives.
How to trade soft commodities
- Research your preferred market
- Decide whether you want to trade or invest
- Open an account or practise on a free demo account
- Select your opportunity
- Set your position size and manage your risk
- Open and monitor your position
There are a few different ways to take a position on soft commodities with us.
Invest in soft commodity stocks and ETFs
You can open a share dealing account to buy and sell shares in soft commodity companies or invest in soft commodity ETFs. Share dealing means you buy and own stocks and exchange traded funds outright. You can buy shares from zero commission with us.2
When you own soft commodity stock, you become a shareholder – gaining voting rights and earning dividends if the company grants them. You’ll have to put up the full value of the position when opening it, as share dealing isn’t leveraged.
Trade soft commodities using spread bets and CFDs
You can open a spread betting or CFD trading account to speculate on the spot (undated), futures and options prices of a range of soft commodities. You’ll also be able to trade on share and ETF prices using derivates rather than owning any actual shares.
You’ll trade spread bets and CFDs using leverage, which means you have to put down a deposit to open a position. Leverage increases profits and losses, as these are based on the full position size, not the deposit. Always manage your risk carefully.
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Soft commodities summed up
- Soft commodities are natural, agricultural products that are cultivated and grown but not mined, such as sugar, wheat, corn, palm oil, soybeans, livestock and more
- There are two types of commodities, soft commodities that are nurtured and hard commodities that are extracted from the ground
- Soft commodities are traded on well-established exchanges, but not directly. You can trade them OTC with us
- People trade soft commodities because the market is volatile, and it offers an opportunity to speculate on the direction of the price
- You can get exposure to soft commodities by trading using spread bets and CFDs, or invest in the market using a share dealing account
Footnotes:
1 Farm Progress
2 Trade in your share dealing account three or more times in the previous month to qualify for our best commission rates. Please note published rates are valid up to £25,000 notional value. See our full list of share dealing charges and fees.
This information has been prepared by IG, a trading name of IG Markets Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. See full non-independent research disclaimer and quarterly summary.
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1In the case of all DFBs, there is a fixed expiry at some point in the future.
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