Soft Commodities

Well here we are discussing the commodities - We have discovered that apart from the Hard commodities there are also soft commodities.  The soft commodities according to the Wikipedia are commodities that are Grown or produced in farming activities.

Corn, Wheat, Soybeans, Sunflowers, Rice, Coffee, Sugar, Cocoa, fruits are just to name a few.  These commodities also has probably the biggest effect on peoples standard of living - as they are often the core ingredient(s) of the food even the poorest people would consume.

The issue with soft commodities are often that they have a limited life and as such limited value.  Unlike gold or the other hard commodities it almost always means that the transactions are limited by time and usability.

The other interesting fact is that the soft commodities almost always lead to people discovering alternative use for the grain or product to support the price in times of low demand.

JD

Hard Commodities

The hard commodities are the backbone of the international markets.  The earliest monetary values one has heard of is gold coins.  Ever since the start of the economic activity in the world man kind has had the need to have something of value that is universally acceptable.  Very early on it turned out that Gold and silver was just that kind of commodity that will have value to most people. 

It was soon evident that for any other money notes or coins to have value it will have to be "backed" by the underlying value in Gold or other precious metal being kept in the custody of the country that has printed or manufactured the moeny.

The other interesting fact is that worldwide the economy even today has the tendency to "run" to gold if anything starts to fail.  We have had several occasions in the history of man where world economy failed and the only safe haven was for investors and banks to run for gold.

There are of course also Platinum, Palladium and Silver.  So we get the interesting situation that when confidence in the world economy is high the price of the other hard commodities tend to rise while the price of gold tend to be stable to even decrease.....

The worldwide trend for the money to be backed by Gold in the repositories tend to be the reason for Gold to be so popular.

JD

Trading commodities?

Why?

We firstly have to destinguish between physical trading where the trade is for the actual commodity.  Although all trades eventually have to get to the physical point - most of the trading on the commodity markets is in the form of derivatives (meaning it is an entity that is derived from the actual commodity)  Most derivatives are in the form of Future contracts (the commodity to be delivered some time in the future at a price that is determined at the time of the transaction).  The markets have also added options to the arsenal where the option to buy or sell is also traded on the market.

People trade commodities for 3 basic reasons:

• They are either the suppliers of the raw material or products
• Or they are the processors of the raw material into usable products.
• Or they are speculating in the market.

Now first of all the supplier would like to get the best possible price for the commodity they are selling.  It is often a very technical analysis and seasonal tendencies occur.  Idealy the supplier would want to sell his product at the top of the price cycle.

The opposite is true of the processor - they would want to get the commodity at the lowest possible price and therefore would like to purchas their stock at the lowest point in the price cycle.

This leads to the requirement of the speculating participant.  They would buy and sell at any time depending on their personal expectation of the market and prices.

The prices are set by the participants making bids to buy and offers to sell and where the buyer and seller meet by virtue of agreeing on a price the deal is struck. These actions happen either in person or these days electronically via trading systems run by the major stock exchanges world wide.

There are several different commodities:

• The Hard commodities that would be the metals and other raw materials.  Gold, Silver and Platinum are the most well known metals. 
• The second group of commodities are the so-called energy commodities which include Crude oil, natural gas and heating oil amongst others.
• The final group of commodities I would like to mention is the agricultural commodities, Corn, Wheat, Soybeans would be just a few.....