Whether you’re interested in stepping into the commodities markets for speculation, hedging or for portfolio diversification, it’s important to gather as much information as you can to become an educated investor. Soft commodities is a common phrase in the alternative investing world, but the actual term can be a bit confusing. While the origin isn’t confirmed, ‘soft commodities’ is generally understood to mean tropical products that are heavily imported. These products include coffee, sugar, orange juice, cotton and cocoa.
Advantages of Investing in Soft Commodities
Tropically grown products are in high demand in the United States — think about the massive daily consumption of coffee and sugar across the United States! Since these items are always sought after, it means a healthier market for these commodities.
Is it Possible to Predict the Unpredictable?
With all of the unscheduled events that can interrupt the production of a product, soft commodities are a difficult market to forecast. However, there is some seasonality to investing in the soft commodities. Since the majority of these products come from other parts of the world, the weather will be very different in other hemispheres than it is in the United States. Hurricanes in the tropical regions can disrupt shipping routes and cause damage to crops. Thus, weather patterns in hurricane season will create volatility in the market. At the end of last December and in the early parts of January this year, sugar has experienced a sudden rally in anticipation of tightening supply in the new administration trade policies. These expectations may have also sparked other fundamental concerns. Throughout most of 2016, sugar went up, but it fell in the last few months last year. This recent surge has brought it back to what is considered a normal level: within the middle of the 2016 range. While predicting the forecast of soft commodities is never completely accurate, with some creative thinking and experience you can hedge your investments in the right direction.
Unconventional Factors Affect Tropical Products
There is a long list of items that can influence the price and demand of a tropical product. Since the weather in warmer climates is more consistent year round — sudden climate change and hurricanes, though, are a huge concern. Since a vast majority of soft commodities are imported, changes in trade policy can have profound impacts on these commodities. Civil unrest in areas like Africa’s ivory coast can cause production and supply issues, directly affecting prices. Cotton has a unique pest called the Boll Weevil that feeds off cotton buds. Should there be a larger population of the Boll Weevil that is resistant to the pesticide, then cotton contracts will experience volatility. Tropical commodities have a whole new arsenal of factors that can affect their prices.
From Boll Weevils to civil unrest, there are a significant amount of factors that contribute to the volatility of the commodities market. The sometimes thin liquidity of softs can cause fast movements in either direction. This makes it crucial for investors to have an understanding of how to navigate the softs market. Working with an experienced broker can help reduce risk when navigating the twists and turns of commodities.