Soft Commodities

Commodities are generally classified into two sectors: hard and soft. Hard commodities include energy, industrial metals, and precious metals. Sot commodities are weather-dependent, perishable commodities for consumption, such as agricultural and livestock products. "Softs" in the narrower sense are luxury foods, such as cof ee, cocoa, sugar, and orange juice, which originate predominantly in tropical and/or subtropical regions.

We can also categorize the following as soft commodities: food and consumer products (e.g., wheat, corn, soybeans, coffee, cocoa, and sugar), industrial agro-raw materials (e.g., cotton and timber), and animal agro-raw materials (e.g., feeder cattle, live cattle, and lean hogs).

Renewable commodities like grains can be produced virtually without limitation, except for the issue of farmland availability. The supply of some commodities exhibits a strong seasonal component. For example, metals can be mined almost throughout the year, but agricultural commodities may depend on a harvesting cycle.

Soft commodities, furthermore, have storability limitations. Livestock, for example, is storable to only a limited degree. It must be continuously fed and housed at current costs, but it is only profitable in a specific phase of its life cycle.

Soft commodity price fluctuations are driven mainly by supply and demand imbalances originating from the business cycle or from unexpected weather patterns. Natural disasters caused by climate change or extreme cold, wetness, or drought can put agricultural commodity crops at risk, which inevitably leads to a price increase.

In addition, the gradual switch from the use of fossil fuels to a larger dependence on biofuels has intensified demand for soft commodities and triggered a change in their use, for example, corn and sugar can increasingly substitute for gasoline.

World population growth and ongoing industrialization and urbanization in emerging markets have also triggered higher demand for soft commodities due to lower global storage. As a result of high price fluctuations, producers, exporters, and traders now commonly hedge their positions with commodity futures. Soft commodities futures contracts are traded mainly on the Chicago Mercantile Exchange, the Chicago Board of Trade, and the New York Board of Trade.

Soft Commodities
Soft Commodities