What are soft commodities?
They are agricultural products or livestock, including corn, wheat, coffee, sugar and soybeans, and pork and beef and so on. Since the dawn of agriculture, farmers have always tried to get a price for their crops as early as possible – or at least guarantee the price and value they would get.
Sometimes when it looked like the price was too low, they might not even have bothered to plant the crop. They’re not modern markets, but Roman growers did long before Eddie Murphy traded the OJ (orange juice) market in the movie Trading Places.
Now with the impact of global warming, we are seeing prices become much more volatile and affected by tight supply chains and we can use this to our advantage.
Driving force: Soft commodities are a set of assets like any other and trading in them is regulated
Should I invest and if so, how?
Soft commodities are a set of assets like any other, and trading in them is regulated. However, for new investors, I would suggest that this is not a market to try their hand at directly.
Trading usually takes place on the cash and futures markets. In English – spot markets are associated with real-time prices.
A soft futures contract is a legally binding agreement for the delivery of your chosen goods (cocoa, coffee, etc.) at a specified time in the future at an agreed price.
Why should I be interested?
While this is a well developed market, I believe that it is only for the professional, not least because other factors such as the weather need to be taken into account.
In recent years we have seen increasingly extreme weather conditions around the world, which can affect both the location and the yield of future crops.
In addition, other aspects must be taken into account, such as a potential interruption in the supply chain, as has been graphically shown over the past few months. However, that does not prevent us from benefiting from investing in this asset class. The main problem is that these commodities do not necessarily behave like ordinary stock markets, even though they influence each other. By diversifying your investments across other asset classes, you move away from concentrating your investments on one area – not all your eggs in one basket!
How can I get soft?
The most cost-effective investment method here is via the passive ETFs that track various indices. Since the US is by far the largest agricultural trade market, in my opinion we find the best products here, such as the Teucrium Corn (CORN) and Soybean (SOYB) funds, which, as their names suggest, only track the prices of these commodities. or the Rogers International Commodity Index – Agricultural Total Return, where there is an ETN (Exchange Traded Note) that tracks the index of a basket of “softs” and has a cheaper expense ratio of 0.75 percent.
So when you have a clear view of the demand for these soft commodities and also have an eye on the impact of global warnings, this is one of the easiest ways to invest.
Justin Urquhart Stewart is co-founder of fund manager 7IM and chairman of the investment platform Regionally.
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