What is a soft commodity?
Soft commodity is any kind of commodity that is grown rather than mined. Several examples of soft commodities include sugar, soybeans, coffee, wheat or fruit. This is, unlike hard commodities, which are usually products such as coal or precious metals that are extracted from the ground rather than cultivated. Soft commodity trading is a significant part of the commodity market, especially when it comes to creating and issuing futures contracts.
Unlike other types of commodities, a soft commodity is usually something that is completely consumed rather than somehow restored. For example, gold and other metals can be recycled over time into new forms. On the other hand, when wheat is grown, sells and consumed, it no longer exists and cannot be used to create ongoing revenues. The investor must buy more wheat to repeat the cycle and gain more profits from his activities.
Futures trading is very common with a soft commodity. Typically maize growers, soybeans orSome other similar commodity contract for the sale of their crops than they are actually ready for harvest. This allows growers to lock prices that can be ordered for their crops, allowing to project the amount of profit they receive as soon as the crops are harvested and converted to the buyer. Investors who suspect that the commodity will have the harvest time will also have investors who suspect that the commodity will benefit from the futures contract. Purchase at a lower price offered today holds the contract until the crops get, and then the sale of crops at a higher market price can gain significant return, provided the market works as expected.
Investors take a certain degree of risk in investing in a soft commodity via futures contract. There would be a demand for Commodposun in a direction that is not anticipated by the investor, there is a chance of losing money rather than profit. For this reason, commodity investors tend to careLook at all factors that could have a negative impact on the prices of the commodity on or near the contract. This involves enabling changes in consumer demand, unfavorable weather conditions that cause crop failure, technological changes that affect the use of crop in different types of packaged products, or lots of commodity on the market that effectively reduce prices.