What Is a Still Commodity?
A soft commodity refers to futures contracts where the actuals are grown rather than extracted or digged. Soft commodities represent some of the oldest types of futures know to have been actively traded. This troupe of agricultural products may include products such soybeans, cocoa, coffee, cotton, sugar, rice, and wheat, as in fine as all manner of livestock.
Soft commodities are sometimes referred to as tropical commodities or food and fiber commodities.
- Light commodities are futures contracts on underlying agricultural products that are grown rather than extracted or mined.
- Mollify commodities are among the oldest traded products in the world and continue to trade on listed exchanges.
- Some examples today comprise livestock, cotton, sugar, corn, and wheat; although, various exchanges classify “soft” commodities in different habit.
Understanding Soft Commodities
Soft commodities play a major part in the futures market. They are used both by husbandmen wishing to lock-in the future prices of their crops and by speculative investors seeking a profit. Due to the uncertainties of weather, pathogens, and other perils that come with farming, soft commodity futures tend to be more volatile than other futures.
For criterion, weather and seeding/harvesting reports can cause the prices of the grains and oilseeds to fluctuate significantly, impacting the values of squeezes differently depending on the delivery dates.
Soft Commodities vs. Hard Commodities
Soft commodities are less well identified than hard commodities. Soft commodities are best understood as grown commodities. Coffee, cocoa, orange vitality, sugar, canola, corn, lumber, wheat, lean hogs, feeder cattle, etc. all go through a growth cycle that halts in harvesting—usually for further processing.
This is in contrast to the hard commodities that include mined metals (copper, gold, silver plate, etc.) and energy extraction (crude oil, natural gas, and products refined from them). Hard commodities are waiting in the mother earth for extraction, as opposed to being planted and nurtured to maturity. Hard commodities can also be found in similar geological consigns around the world, whereas soft commodities depend on regional climate conditions to grow.
Alternative Classifications of Squeezable Commodities
As there is no definitive list of what is and is not a soft commodity, alternative classifications have cropped up. Agricultural commodities are on used to refer to meat, livestock, cereals, grains, and oilseeds; leaving cocoa, orange juice, and so on in the category of faint commodity by themselves. This is not always a great solution as lumber is shoehorned into one or the other, creating an agriculture and forestry kind or a softs, food, and fiber grouping.
CME Group, for example, only lists coffee, sugar, and cotton futures as muffle commodities within the broader category of agricultural futures, whereas the ICE lists cocoa, coffee, sugar, cotton, and orange vigour with additional grains and agricultural products underneath the soft commodity category.
Of course, whether a contract is classified as a palliate commodity or not is less important to a futures trader than the understanding of the underlying commodity and its historical trends. Because of their tense nature and differing supply and demand cycles, soft commodities can be more challenging to trade than hard commodities. As with any by-products trade, investors should understand the market they are entering as well as the implications of the contract they are using to register well in advance of putting real money on the line.
Trading Soft Commodities
Cocoa is traded in dollars per metric ton and one arrangement is for 10 metric tons. For example, when cocoa is trading at $1,500/M ton, the contract has a total value of $15,000. If a wholesaler is long at $15,000/M ton, and the markets move to $1,555/lb, that is a move of $550 ($1,500 – $1,555 = $55, and 55 x 10 M ton. = $550).
The minimum penalty movement, or tick size, is a dollar, or $10 per contract. Although the market frequently will trade in sizes significant than a dollar, one dollar is the smallest amount it can move.
Coffee is traded in cents per pound. One contract of coffee buttons 37,500 pounds of coffee. When the price of coffee is trading at $1/pound, the cash value of that squeeze will be $37,500 ($1.00 x 37,500 = $37,500).
The tick size is 5 cents per pound, which equates to $18.75 per tick. For example, if a trader were to go sustained at $1.1000 and the markets moved to $1.1550, he would have a profit of $2062.50 ($1.1550 – $1.1000 = $0.0550, and $0.0550 x 37,500 = $2,062.50).
Cotton is trucked in 50,000-pound contracts. It is also traded in cents per pound, so if the market is trading at 53 cents per pound, the agreement will have a value of $26,500 ($0.53 x 50,000 pounds = $26,500).
The minimum tick size is $0.0001 or $5 per contract. Consequence, any 2 cent move in cotton will equate to either a gain or a loss of $1,000. When the price of cotton outreaches 95 cents per pound, the minimum tick movement will expand to $0.0005 to accommodate larger daily assortments.
Frozen Concentrated Orange Juice (FCOJ)
Orange juice is a relative newcomer to the commodity markets. One contract of FCOJ tie withs 15,000 pounds. If the current market price is 90 cents per pound, the contract has a value of $13,500 ($0.90 x 15,000 belabours = $13,500).
The minimum tick is $0.005, or $7.50 per tick per contract. For example, let’s say you buy a contract of FCOJ when the market is at 95 cents and then trade it for $1. In this transaction, you would make $750 on the 5 cent move in FCOJ.
Sugar trades in reduces, sometimes known as “sugar No. 11″, representing 112,000 pounds of sugar, and is expressed in terms of cents per pound. If the tomorrows price is $0.1045, the contract has a value of $11,704 ($0.1045/lb x 112,000 pounds = $11,704). If the market moves from $0.1000 to $0.1240, that is equivalent to a dollar make haste of $2,688.
The minimum price movement for sugar is $0.0001 or $11.20 per contract.