What Are Soft Commodities

There are all kinds of different commodities, all of which come from the earth. You may be wondering what are soft commodities? Soft commodities are anything that must be grown instead of mined. Hard commodities include gold, silver, coal — anything that is taken from the earth rather than grown. The soft commodity category includes things like oranges, coffee, wheat, soybeans, sugar and corn to name a handful of examples. The trading of soft commodities is a large part of the market when it comes to futures.

Soft commodities are consumable. This is in contrast to something like silver, which can be recycled and remade into something new. So, it continues to create returns. However let’s use sugar as an example. Sugar cane is cultivated, sold then consumed. After consumption, it does not exist, therefore it cannot continue to generate profit. More sugar cane must be grown and the process must begin anew. As an investor, you would need to buy more sugar to earn more profits from this soft commodity. And this is only an example, this rule applies to all soft commodities.

One investment strategy that is quite common in the world of soft commodities is futures trading. Farmers who grow things like wheat, soybeans or corn enter into futures contracts to sell the commodities before harvest time. This lets them lock in the price they want to ask for their crops, which in turn allows them to estimate the profit from their upcoming harvest. From the other side, investors who speculate the commodity will be worth a higher amount at harvest than it currently is can make money with a futures contract by purchasing now, then holding onto the contract until the harvest is completed and the price goes up. This isn’t always the way it goes, but it is the way investors hope it goes when entering into futures contracts.

There is always risk involved when investing in anything, and this is of course true for futures contracts and commodities. For example, if a soft commodity demand goes in the opposite direction speculated by the investor, there can be a loss rather than a profit. Many factors that are outside human control, like the weather, can affect soft commodities. So, when considering investing in commodities or futures contracts, be prepared to assume the risk involved. Soft commodities and soft commodity futures contracts can be profitable, but are best when part of a portfolio that has medium and low risk investments as well to provide a financial cushion.

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