Soft commodities include sugar, cocoa, coffee, orange juice and cotton.
People have been using sugar for over two thousand years, when it was originally reserved for the very rich. Today, sugar is one of the most heavily traded commodities globally.
Sugar commodity contracts expire in March, May, July and October and a one point movement on a commodity CFD contract is worth USD5.60. So if a trader chose to go long on a single sugar contract, and its value rose by 25 points, he would make a profit of USD140 (USD5.60 per point x 25).
Cocoa was discovered by the natives of Central America over three thousand years ago, where it was a luxury for the rich. Today, most of the world's cocoa is grown in the Ivory Coast, Ghana, Indonesia, Brazil, Ecuador and Nigeria. This means that when there is turmoil in those regions, the price of cocoa increases due to the expected disruption of supply.
Cocoa contracts expire in March, May, July, September and December. A one point move in a commodity CFD contract is worth USD5.
Coffee was originally discovered over two thousand years ago in Ethiopia. From Africa, coffee made its way to the Middle East and into coffee houses, where it was introduced to travelers who spread its use beyond the region.
Coffee contracts expire in March, May, July, September and December. Coffee commodity trading contracts are worth USD1.88 per single point movement.
Orange juice is a new commodity on the markets – as orange juice was traditionally consumed as a fresh juice, it had a short shelf-life and was, consequently, susceptible to price shocks due to supply disruptions.
Freezing orange juice began in the 1940s and then became the industry standard, the longer shelf-life turning it into a tradeable instrument.
Cotton was discovered over five thousand years ago and was one of America's first cash crops. Cotton is a very influential commodity due to its wide range of uses and contributions to a large volume of commodity trading.
Cotton contracts expire in March, May, July, October and December and a one point contract movement is worth USD2.50.
How to trade commodities
Commodity trading is usually performed with futures contracts, which are agreements that the commodity will be delivered at a certain time in the future at an agreed-upon price. The quantity, quality, time and place of delivery are all standardized aspects of the contract; the only variable is the price.
Unlike trading shares, which can only be bought in the hope that the share price will rise and the trader will make a profit by selling the shares at a higher price, commodity futures can be short sold, meaning that a trader can make a profit in a falling market by selling a futures contract and buying it back at a lower price.
If a trader chose to go short on coffee and the price fell by 50 points, he would make a profit of USD94 (USD1.88 x 50 points).