Five commodities you (probably) didn’t consider trading

Many traders are drawn into the financial world by the ability to trade commodities. Commodities are physical objects found or grown in nature that are then processed to make human life easier. Think of things like oil, gold and sugar.

Traders are drawn to commodities as an asset class because these physical resources are not always directly correlated to stock market movements. They can offer price action in periods when assets like shares and indices aren’t very exciting. Conversely, a commodity like gold is widely regarded as a safe-haven asset – a place to keep money safe when the heat is on (or anticipated) in other markets.

Financial traders keep a close eye on commodities like Brent crude oil, natural gas and gold because these commodities are widely traded. However, these huge global markets aren’t the only way to trade commodities.

Soft commodities can offer opportunities to diversify your portfolio, find price action not correlated to the stock market and try new trading strategies. These are resources humans can grow or tend.

Global demand for soft commodities continues to grow as the world population increases. However, the supply of these resources can be severely affected by short-term factors like the weather caused by long-term concerns like climate change. Traders who keep an eye on the supply side of soft commodities can often anticipate commodity price changes ahead of time based on these secondary factors like the weather and use instruments like futures contracts to speculate on the potential impact of these resources.

While it’s not possible to buy these commodities outright from IG, the below five commodities can be traded via CFDs with IG.

1. Coffee
2. Cocoa
3. Oats
4. Lean hogs and live cattle
5. Orange juice

Coffee

If you enjoy an invigorating cup of coffee every day, you are one of a billion people who share that ritual. That’s a (ahem!) robust target market. Coffee is produced around the world, from Central and South America to south-east Asia and Africa.

Coffee prices can experience significant volatility due to various factors. Some typical factors that can affect prices include:

• Stock levels in major producing countries like Brazil
• Soil moisture conditions that might affect future crops
• Weather events in key growing regions like Vietnam that could delay harvests
• Impact of tropical storms and other weather events on supplies

For a coffee trader, all these factors are data points that can influence trading decisions. One trader might look at these factors, anticipate a coffee shortage, expect prices to go up and go long. Another trader might look at these same data points, decide the market is overreacting, expect prices to go down and go short. A technical analyst might ignore these factors altogether and make a decision only on the strength of the price chart.

As always, it’s never a good idea to base future trading decisions based on past performance.

Cocoa

If you're a chocolate lover, you may have noticed changes in chocolate prices over time. These price fluctuations often start with the cocoa market. Unlike coffee, most cocoa is produced in West Africa, with Côte d’Ivoire and Ghana producing half of the global supply. Some cocoa is also produced in Ecuador in South America and Indonesia in Southeast Asia, but the price of cocoa is heavily influenced by what goes on in West Africa.

In 2024 Ghana experienced below average rainfall paired with higher than usual temperatures. Côte d’Ivoire reduced export contracts for the season by 40% due to poor weather conditions too. Considering these two countries account for the majority of cocoa production, the market was expecting a drop in supply of cocoa. If you remember your high school economics, that drop in supply could lead to an increase in price. This is bad news for your grocery budget but could provide an interesting trading opportunity.

Weather conditions and production levels in major cocoa-producing regions can significantly impact global supply and prices. Remember to conduct your own research and monitor current market conditions.

Oats

In addition to wheat, rice and corn, oats are a useful soft commodity. It is an important crop for animal feed and human consumption. Oats are also used in cosmetics production.

Most of the grain is grown in the European Union, Russia, Canada and Australia as the crop favours colder weather. Like coffee and cocoa, weather conditions affect supply which affects the price of oats. However, since the production of oats is spread across the world, the impact of unfavourable weather isn’t as severe as with crops mostly grown on certain continents, as is the case with cocoa.

Traders use the price of one grain as an indicator of what will happen to the price of other grains. That’s because grains are often planted in similar regions, are affected by the same weather patterns and are transported and stored in the same way. A disruption in part of the supply chain for one grain is often felt across all the grains. Similarly, if global demand for one grain slows due to factors like exchange rates or energy prices, other grain prices will be similarly affected.

Traders are aware of the links between grain prices. This awareness can result in price changes in one type of grain due to a market response to price changes in another type of grain.

These complex links between grains means traders who trade one grain tend to trade them all, if only indirectly.

Lean hogs and live cattle

A trading platform is the last place on earth one would expect to find lean hogs and live cattle, but the global demand for meat is not slowing down despite advancements in alternatives. Global meat consumption represents a substantial portion of worldwide food consumption, and demographic trends suggest continued demand growth. For traders this means potential opportunities.

Both lean hog and live cattle futures contracts are traded on the Chicago Mercantile Exchange. Lean hog contracts are sold in lots of 40,000 pounds. Together with feeder cattle, lean hog and live cattle contracts are grouped under livestock futures contracts. As is the case with grains, these three commodities have similar production, demand and supply risks.

Orange juice

Orange juice is another product that seems more at home on the breakfast counter than the stock market. Yet the orange juice trade, specifically trade in frozen concentrated orange juice (FCOJ) is alive and well!

Like most of the strange commodities featured in this article, orange juice is manufactured for consumption in the home. Because not many traders trade orange juice futures, it can be hard to see price action in the commodity. Even so, 2024 saw orange juice futures reach all-time highs.

A shortage in orange juice caused by bad weather and disease resulted in massive price movements for FCOJ. Brazil - which produces almost 70% of the world’s orange juice – and Florida in the USA were both affected by a disease caused by sap-sucking insects that spoil the fruit and kill the trees. The situation in Florida was further compounded by a series of hurricanes. This disruption in supply lead caused traders to anticipate a rise in orange juice prices.

As always, nobody can predict if this golden age of orange juice will continue for much longer since past prices don’t reflect future performance.

Trading soft commodities offers unique opportunities for market participants interested in diversifying beyond traditional financial instruments. These markets are driven by fundamental factors that often differ from those affecting stocks and bonds – from weather patterns and agricultural diseases to global consumption trends and transportation logistics.

For traders willing to invest time in understanding these unique markets, soft commodities can provide interesting opportunities for portfolio diversification. However, like any trading activity, it requires dedication to continuous learning, careful analysis, and prudent risk management.

Final Note: Trading in soft commodities requires careful consideration of your investment objectives, risk tolerance, and market knowledge. Always conduct thorough research and consider seeking professional financial advice before entering these markets.