Soft commodity markets are made up of perishable goods such as cocoa, coffee, cotton, orange juice, and sugar, which are also some of the oldest tradable commodities that still exist. You can trace its roots in commerce over thousands of years. It is important to note that trading in this market involves substantial risk and is not suitable for everyone, and only risk capital should be used. In this article, we will show you how to use this “sweet” market correctly, because any investor could lose more than they originally invested.
- Soft commodities refer to futures contracts on underlying agricultural products that are grown rather than mined or mined.
- Soft commodities are among the oldest traded products in the world and continue to trade on publicly traded exchanges.
- Here, we look at futures traded in cocoa, frozen orange juice, sugar, cotton, and coffee.
What are soft futures contracts?
A soft futures contract is a legally binding agreement for the delivery of cocoa, coffee, cotton, frozen concentrated orange juice and sugar in the future at an agreed price. The contracts are listed and standardized by the Intercontinental Exchange (ICE) Futures US, formerly known as the New York Board of Trade (NYBOT), and regulated by the Commodity Futures Trading Commission, in terms of quantity, quality, time and place of delivery. Only the price is variable.
Most futures contracts are cleared before delivery, which means that most contracts are speculators trying to profit from price movements.
Advantages of futures contracts
Unlike stocks, futures contracts can short on a dip, giving market participants greater flexibility. This flexibility allows hedgers to protect their physical position and speculators to take a position based on market expectations.
Because soft commodity markets are traded on an exchange, clearing services ensure that there is no risk of default. This means that the exchange acts as a buyer for all sellers in the event that a market participant has to default on its responsibilities.
Although there are other sugar and coffee contracts that are traded around the world, this article deals only with those that are traded on ICE Futures US.
Discovered by the natives of South America more than 5,000 years ago, cocoa was originally a luxury for the very wealthy. Today, most of the world’s cocoa is grown in a handful of countries: Côte d’Ivoire, Ghana, Indonesia, Brazil, Ecuador, and Nigeria. It is now used in everyday foods, from hot chocolate to chocolate.
Cocoa is traded in dollars per metric ton and a contract 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 trader is long at $ 15,000 / M t, and the markets are moving at $ 1,555 / lb, that is a move of $ 550 ($ 1,500 – $ 1,555 = $ 55 and 55 x 10 M t = $ 550).
The minimum price movement, or tick size, is one dollar or $ 10 per contract. Although the market often trades in sizes greater than a dollar, a dollar is the smallest amount you can move.
The monthly contracts for the delivery of sugar are March, May, July, September and December. Delivery points include licensed warehouses in the New York Harbor District, the Delaware River Harbor District, the Hampton Roads Harbor, the Port of Albany, or the Port of Baltimore.
Coffee was originally discovered in Ethiopia around 850 AD From Africa, coffee reached the Middle East and coffee shops. It was these coffee shops that gave coffee its exposure to many travelers, who spread its use outside the Arab borders.
Coffee is marketed for pennies a pound. A coffee contract controls 37,500 pounds of coffee. When the price of coffee is trading at $ 1 / pound, the cash value of that contract will be $ 37,500 ($ 1.00 x 37,500 = $ 37,500).
The tick size is 5 cents per pound, which is $ 18.75 per tick. For example, if a trader were long at $ 1.1000 and the markets moved to $ 1.1550, he would make a profit of $ 2062.50 ($ 1.1550 – $ 1.1000 = $ 0.0550 and $ 0 , 0550 x 37,500 = $ 2,062.50).
Because it is one of the largest contracts in dollar terms, small movements have a big impact on the price. Coffee has one of the largest daily ranges of all the soft ones, making it a very volatile product.
The coffee is delivered in March, May, July, September and December. Delivery points are worldwide in ports around the world such as New Orleans, New York, Houston, Miami, Hamburg, Antwerp and Barcelona.
Because cotton has universal appeal and can be used in many different products, it has been one of the most influential commodities. Discovered more than 5,000 years ago, cotton has played a critical role in the rise and fall of many countries. It was one of the first commercial crops in the United States.
The cotton is traded in contracts of 50,000 pounds. It is also traded in cents per pound, so if the market is trading at 53 cents per pound, the contract will be worth $ 26,500 ($ 0.53 x 50,000 pounds = $ 26,500).
The minimum tick size is $ 0.0001 or $ 5 per contract. Therefore, any 2 cent move in the cotton will equal a profit or loss of $ 1,000. When the price of cotton exceeds 95 cents per pound, the minimum tick movement will expand to $ 0.0005 to accommodate the wider daily ranges.
March, May, July, October and December are the contract months for cotton. Delivery points are in Galveston, Houston, New Orleans, Memphis, and Greenville / Spartanburg, which isn’t too surprising considering that’s where most of it is grown.
Frozen Concentrated Orange Juice (FCOJ)
Orange juice is relatively new to the commodity markets. For centuries, orange juice was consumed as fresh fruit juice because it had a relatively short shelf life and was susceptible to price shocks due to supply disruptions. Orange juice freezing was invented in the 1940s and quickly became the industry standard.
One FCOJ contract equals 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 pounds = $ 13,500).
The minimum tick is $ 0.005, or $ 7.50 per tick per contract. For example, let’s say you buy a FCOJ contract when the market is 95 cents and then sell it for $ 1. In this transaction, you would earn $ 750 on the 5-cent move in FCOJ.
Oranges sourced from Brazil and Florida can be delivered to licensed exchange warehouses in Florida, New Jersey, and Delaware only. FCOJ is most actively traded in January, March, May, July, September, and November.
It is widely believed that humans first used sugar more than 2,000 years ago. Originally reserved only for the very wealthy, sugar has become one of the most common staples on the table. Due to its mass appeal, sugar is often one of the most traded commodities in the world in terms of total volume.
Sugar is traded in contracts, sometimes known as “No. 11 sugar,” which represents 112,000 pounds of sugar and is expressed in terms of cents per pound. If the futures price is $ 0.1045, the contract is worth $ 11,704 ($ 0.1045 / lb x 112,000 pounds = $ 11,704). If the market moves from $ 0.1000 to $ 0.1240, that equates to a dollar move of $ 2.688.
The minimum price movement for sugar is $ 0.0001 or $ 11.20 per contract.
Sugar can only be delivered in March, May, July and October. There are delivery points in every nation where sugar is produced. These are places like Argentina, Australia, Barbados, Belize, Brazil, Colombia, Costa Rica, Dominican Republic, El Salvador, Ecuador, Fiji Islands, Guatemala, Honduras, India, Jamaica, Malawi, Mauritius, Mexico, Mozambique, Nicaragua, Peru, Republic of the Philippines, South Africa, Swaziland, Taiwan, Thailand, Trinidad, the United States and Zimbabwe.
The bottom line
There are many different opportunities in the soft commodity markets. Anyone wishing to invest should carefully consider the risk involved and know the contract specifications before investing.