Trading agricultural commodities is a good way for traders to diversify their portfolios when they have invested in stocks, forex, and other products. They are also a good way for traders to hedge their current positions when other markets are volatile, and this is because commodities are usually less likely to be directly affected by stock market upheavals.
What are commodities?
Commodities, for a start, are basic goods that are used in commerce and can be bought and sold in exchange for other commodities, money, or other assets. Commodities come in two general sub-types: ‘hard’ commodities and ‘soft’ commodities. Hard commodities refer to mined products such as crude oil, while soft commodities refer to a specific subset of agricultural products that fall outside of the general classifications.
What are agricultural commodities?
Agricultural commodities are goods related to farming or products of agricultural endeavours. They range from livestock such as cattle, to animal products for production and consumption, such as dairy products, chicken eggs, and leather, to crops, such as wheat, soybeans, and corn.
As previously mentioned, soft commodities are a subset of agricultural commodities, classifying the rest of the products that do not quite fit into the above categories yet are still grown rather than mined. These include cocoa, coffee, frozen concentrated orange juice (FCOJ), and sugar.
Agricultural commodities are constantly in high demand, and they can be a lucrative product to trade. In fact, they make up over 10% of the total trade in commodities, alongside metals, precious metals, oil, and more. This is because food products are always being consumed.
How are agricultural commodities traded?
Agricultural commodities are traded through contracts, such as CFDs and future contracts. This is because physical products are, most of the time, difficult to trade physically. When traders buy and sell agricultural commodities, they are referring to their speculation of the prices on the underlying assets and do not actually meet up for a physical trade of, say, 50 cattle or 3,000 heads of corn.
As their supply and demand are closely tied to real-world conditions (for example, a country experiencing a bad year of wheat growth will have a huge effect on the supply of wheat and consequently, its price), many traders rely on fundamental analysis to predict the market.
Traders keep an eye on the news and make mental note of countries experiencing war, famine, population booms, and they keep a close eye also on countries establishing new infrastructure for agriculture such as solar panels, irrigation tools, and processing and transport factories. All of these can affect the supply and demand of these commodities, which can cause market prices to fluctuate.
Who are the main players in agricultural commodity market?
There is no one ‘single’ market in agricultural commodities, as each product is traded independently. However, there are several key players globally that contribute heavily to the asset value of these commodities.
Brazil and the United States come neck-to-neck in being the leading global producer of soybeans year-in, year-out. Much of these soybeans are exported to China, Mexico, and Argentina. Brazil is also the top exporter for coffee and sugar. As for dairy products, New Zealand is the leading exporter of milk worldwide, followed by Germany. Top importers include China, the Netherlands, and Belgium. In terms of soft commodities, the top exporter of cocoa is Ghana, followed by Ecuador.
As you can see, the state of diplomatic relations is hugely important in the trade of agricultural commodities. Understanding who the main players in the markets are and their relationships can give traders great insight into potential market price fluctuations.
Conclusion
Trading agricultural commodities can be a lucrative way to make a profit. It is also an effective way to hedge against open positions that you may have in other markets to minimise losses in times of high volatility. As the world continues to depend on agricultural goods for consumption and production of more complex goods, the trade of commodities will always be active.