Hard vs Soft Commodities

A product or a good that can be easily bought and sold in the market.

Author: Tanishk Rathore
Tanishk Rathore
Tanishk Rathore
My undergraduate experience and internships are to thank for my skills in areas like research, analysis, communication, critical thinking, technical proficiency, time management, attention to detail, and adaptability. As a student majoring in civil engineering, I have developed a solid foundation in its specialisations. I worked as an intern for the DRDO at the University of Cambridge.
Reviewed By: Matthew Retzloff
Matthew Retzloff
Matthew Retzloff
Investment Banking | Corporate Development

Matthew started his finance career working as an investment banking analyst for Falcon Capital Partners, a healthcare IT boutique, before moving on to work for Raymond James Financial, Inc in their specialty finance coverage group in Atlanta. Matthew then started in a role in corporate development at Babcock & Wilcox before moving to a corporate development associate role with Caesars Entertainment Corporation where he currently is. Matthew provides support to Caesars' M&A processes including evaluating inbound teasers/CIMs to identify possible acquisition targets, due diligence, constructing financial models, corporate valuation, and interacting with potential acquisition targets.

Matthew has a Bachelor of Science in Accounting and Business Administration and a Bachelor of Arts in German from University of North Carolina.

Last Updated:November 15, 2023

What are Hard vs Soft Commodities?

A commodity is a product or a good that can be easily bought and sold in the market. Some examples of entities include coffee, rubber, oil, metals, and other agricultural products.

Commodities are generally classified into two categories: hard and soft items.

  • Hard commodities: Commodities that are naturally occurring raw materials mined and extracted from nature.
  • Soft commodities: Commodities grown or produced over time, including agricultural and other related primary products.

These commodities are freely traded on physical and virtual marketplaces known as commodity markets. The commodity market is one of the famous markets where traders speculate on the prices of different goods or services to make money.

This market is volatile and risky, and it is, for this reason, often preferred by experienced traders and institutional investors.

Demand supply, changes in the foreign exchange rate, geopolitical matters and relations, changes in consumption patterns, weather patterns, economic growth, government policies, and rules and regulations are some macroeconomic factors that influence the price of a commodity.

Later in this article, factors that impact the price of a commodity will be covered in detail. Some examples of hard commodities are crude oil, natural gas, and gold. Some examples of soft things include wheat timber and pulse.

The commodities market has a massive impact on the economy; it is for this reason that it is crucial to understand the types of commodities and factors influencing them.

Soft Commodities

These are the commodities that are grown or produced over some time, including agricultural and other related primary products.

It includes agricultural and farming products. It is not as intensive as hard commodities. The producer market of soft commodities includes the large MNCs and individual producers. Most soft things are perishable and have a smaller shelf life. These commodities are also known as 'tropical commodities' or food, fiber, and commodities. It is also popularly called 'softs.'

Its price depends upon multiple factors like vagaries of weather, crop diseases, and other inherent risks associated with farming and agriculture; due to this reason, they are more volatile than hard commodities.

It includes cattle, lean hogs, wheat, corn, timber, coffee, orange, milk products, etc. The by-product of soft commodities also lies in the same category.

The production of these commodities mostly depends upon a respective country's environmental and climatic conditions because different goods grow under other environmental conditions, including soil, humidity, temperature, and water levels. It is used by farmers who want to fix the future prices of a commodity in the present and to make profits through speculation.

Hard commodities

These are naturally occurring raw materials mined (silver and gold) and extracted (crude oil and ethanol) from nature.

The by-product of these commodities lies in the same category. It is operational intensive. It can also be found in similar geological deposits in the world. Due to large fund requirements, the extractor of hard commodities is mostly MNCs. The most traded hard commodities traded in the commodity market include:

  • Energy: Crude oil, gasoline, natural gas, ethanol
  • Precious metals: Platinum, silver, copper, gold 
  • Base metals: Copper, iron ore, aluminum   

They are common underlying assets for future contracts. Therefore, it constitutes a significant portion of the commodities market. Hard commodities generally have a longer shelf life. Thus, the volatility is comparatively lower.

These commodities are generally traded among different countries. The amount of trade in an economy of hard commodities measures the country's global economic development and health. Hard commodities are an excellent way to measure global economic health regarding the amount of trade.

In this, the contract size depends on the type of commodity that the trader trades in.

Contract size: It is the quantity of stock, good or commodity, or any other financial asset that is delivered, underlying a futures or options contract.

For example, the futures contract between gold and silver will be different, even though they belong to the same category, i.e., hard commodities. 

Factors affecting commodity price

Various factors affect the price of a commodity. Some of the internal and external factors that influence the cost of hard and soft things are as follows:

1. Hard Commodity

These commodities are traded inter-countries, and prices of these commodities are affected by a large number of factors, some of which are as follows:

  • Demand and supply: An entity's cost majorly depends upon the demand for goods and services. A commodity with higher demand will be priced higher, whereas if the supply is higher than the demand, it will be priced lower.
  • The Commitment of Traders report (COT): The COT report keeps a record of prominent open positions in the market. It mainly includes banks and other net-worth individuals. This report is published by the Commodity Futures Trading Commission (CFTC).
  • Geo politics and international trade: Hard commodities are generally composed of raw material that is mined and extracted; due to this feature, they are found in specific countries. Therefore government regulations on import, export, duties, charges, foreign relations, and political stability are some factors that are considered when determining the prices of the commodities.

2. Soft commodities

Unlike hard commodities, these commodities are traded intra-country; a tiny portion is traded between countries. Some of the factors that influence soft things are as follows:

  • Weather reports: As soft commodities are produced and grown under specific environmental conditions, it is essential to know the weather conditions of that particular region. For this reason, each country has its weather reports which help to understand the weather patterns and whether the prices of commodities fall or rise.
  • The Commitment of Traders report (COT): Soft commodities are also included in COT, which represents detailed information of open interest and short and long positions of each entity. It also briefly represents an overview of demand and supply in the economy.

Trading Gard Vs Soft Commodities

Both hard and soft commodities can be used for trading and investment purposes. There are several ways by which an investor can invest in items.

Mutual funds and Exchange Traded Funds (ETFs) are some of the examples of investment options that primarily focus on companies whose core activities include the production, process, and distribution of goods.

Investors often invest in derivatives of commodities, i.e., futures and options. In the derivative markets, the price depends upon the value of its underlying asset.

These derivative markets are regulated by commodities exchanges, providing safety and security to investors' funds.

Soft commodities can be traded both in exchanges and over-the-counter (OTC).

Some well-known exchanges in the UK famous for soft commodities are the ICE, the CBOT, and the Kansas Board Of Trade (KBST).

Trading in OTC markets involves various kinds of risks; it is for this reason investors prefer them less.

Some of the examples of prominent commodity exchanges where the goods are primarily traded are the Chicago Mercantile Exchange Group ( CME), Shanghai Futures Exchange (SHFE), and Intercontinental Exchange (ICE).  

A few short pointers to keep in mind before starting trading in a commodity market are as follows:

  • Research a preferred market and commodity you want to trade.
  • Decide whether you have to trade or invest.
  • Calculate the risk-reward ratio associated with that trade.
  • Calculate the total amount you have to consider while trading.

Hard vs Soft Commodities FAQs

Researched and authored by Tanishq | LinkedIn

Reviewed and edited by Sakshi Uradi | LinkedIn

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