Five commodities you (probably) never considered trading

Why traders choose commodities

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 are less dynamic.

These are resources humans can grow or tend, including agricultural products like wheat or livestock.

Financial traders also keep a close eye on Brent crude oil and ​natural gas, because these commodities are widely traded. Moreover, gold which is widely regarded as a safe-haven asset - a place to keep money safe when other markets face turbulence.

However, these huge global markets aren’t the only way to trade commodities.

Opportunities in soft commodities

• Diversify your portfolio
• Find price action not correlated with the stock market
• Try new trading strategies

Global demand for soft commodities continues to grow as the world population increases. However, the supply can be severely affected by factors like the weather.

Traders who monitor the supply side of soft commodities may anticipate commodity price changes by considering factors like the weather and using instruments like futures contracts to speculate on potential impacts. However, success requires continuous learning, careful analysis, and risk management.

Five soft commodities to trade

Trade your morning cup of coffee

If you enjoy a cup of coffee every day, you are one of a billion people who share that ritual. Arabica coffee is produced worldwide, from Central and South America to Southeast Asia and Africa.

Coffee prices can experience significant volatility due to various factors. These factors include:

• Stock levels in major producing countries like Brazil
• Soil moisture conditions affecting 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, these factors are data points that can influence trading decisions. One trader might anticipate a coffee shortage and hold a long position, while another might see the market overreacting and go short. A technical analyst might ignore these factors altogether and rely solely on price charts.

As always, past performance is not a guarantee of future performance.

Cocoa futures: sweet opportunities in chocolate’s key ingredient

Chocolate lovers may have noticed changes in prices over time, often starting with the cocoa market. Unlike coffee, most cocoa is produced in West Africa, with Côte d’Ivoire and Ghana contributing half the global supply. Some cocoa is also produced in Ecuador and Indonesia, but the West African influence is significant.

In 2024, Ghana experienced below-average rainfall with high temperatures and Côte d’Ivoire reduced export contracts for the season by 40% due to poor weather. Considering these countries account for most cocoa production, a supply drop was expected, potentially leading to price increases. While this affects consumer budgets, it presents trading opportunities.

Weather conditions and production levels in cocoa-producing regions significantly impact supply and prices.

Oats: gains on grains

In addition to wheat, rice, and corn, oats are a useful soft commodity for animal feed and human consumption, and they are also used in cosmetics production.

Most oats are 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, global distribution lessens the impact compared to crops grown mostly on certain continents, like cocoa.

Traders often use the price of one grain to predict others because grains are planted in similar regions, affected by the same weather, and share logistical processes.

Lean hogs and live cattle

A trading platform might seem an unusual place for lean hogs and live cattle, yet global meat demand continues to grow. This suggests potential opportunities for traders.

Both lean hog and live cattle futures contracts, traded on the Chicago Mercantile Exchange, represent significant commodities. Lean hog contracts are sold in lots of 40,000 pounds and, along with feeder cattle, fall under livestock futures contracts. Similar production, demand, and supply risks apply.

Orange juice: squeezing profits from citrus commodities

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.

However, given that 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.

Disruptions in supply due to bad weather and disease led to massive price movements for frozen concentrated orange juice (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 traders to anticipate a rise in orange juice prices.

Where to trade soft commodities

You can trade these five soft commodities with an IG CFD account.

Contracts for difference (CFD) trading involves buying and selling contracts for difference - financial derivatives that let you take a speculative position on whether an asset, including commodities, will rise or fall in value. Remember, CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage.

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.