Why trade soft commodity markets?
There are a number of reasons why people choose to trade soft commodity markets. First, it’s important to understand that this specific sector is very volatile, as agricultural production is notoriously unpredictable. Traders who prefer high-risk markets, often choose soft commodities because their price fluctuations could present more trading opportunities.
However, its volatile nature also means soft commodities carry high risk. An unfavourable weather event – like heavy rains or a drought, for example – can cause havoc on soft commodities, causing drastic price changes in a short period of time. Further, changes to import and export volumes can also directly affect soft commodity prices.
A more recent example of the volatile nature of soft commodities can be seen in the effect of the Ukraine-Russia war. Corn prices increased rapidly, partly due to the fact that Ukrainian corn crops were 54% smaller than in 2021 – restricting supply.1
Trading soft commodities on leverage only amplifies the risk. You should always take appropriate risk management steps when opening a position using derivatives.