Coffee, cocoa, sugar – how to invest in soft commodities on stock exchanges?

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Coffee, cocoa and sugar are goods that not only diversify our taste sensations, but also a way to make a profitable investment. Their quotations are highly volatile in the long term, therefore they attract the attention of an increasing number of speculators. How to start investing on these quite exotic resources?

When trading commodities, most investors focus their attention on the gold or oil market. Their popularity is related to the impact they have on the economy in a given region. Agricultural commodities may not have these advantages, but they are certainly a good trade opportunity. A large number of financial instruments based on them can help. Let’s find out how to invest in soft commodities . Before we get down to them, however, we will present some basic information about sugar, cocoa and coffee.

Sugar – basic information

Sugar has been grown for over ten thousand years. Until the 18th century, however, it was a luxury and most of the goods had to be imported across the ocean. It was only because of the Industrial Revolution and the use of steam engines in the production process that it became widely available to everyone.

Sugar is most often made from sugar cane or sugar beet. Cane plantations are found in warm climates such as Brazil, India, China, Thailand and Mexico, which are the largest producers of this commodity. Beets, on the other hand, are grown in regions with cooler climatic conditions: Europe, Japan and the USA.

The highest per capita consumption of sugar in the world is in Belgium – 40 kilograms per year. Its price is in US cents per pound, which is 0.453 592 37 kg. Now let’s move on to the next raw material.

Cocoa – basic information

Cocoa is beans obtained from cocoa beans. Powder obtained from them is a very popular ingredient in many confectionery products, such as chocolates, drinks and masses.

About five million tons of this raw material are produced per year. The largest producer is Côte d’Ivoire, which produces over 20% of global demand. It is followed by Indonesia, Ghana, Nigeria and Cameroon.

The price of cocoa is expressed in US dollars per ton.

The last presented soft commodity is coffee.

Coffee – basic information

Coffee is the main source of caffeine and one of the most popular stimulants in the world. Most office workers are with her every day and they appreciate her presence on store shelves. The highest consumption of this raw material per person in the world is recorded in Finland – around 13 kg per year.

It comes from Ethiopia, where the fruit of the coffee tree was used as early as the 1st century BC. The largest producers of this product are Brazil, Vietnam, Indonesia and Colombia. They provide consumers with two varieties of beans – the cheaper Robusta and the beloved Arabica.

The price of coffee, like sugar, is in US cents per pound.

Time to analyze the prices of these commodities in the past.

Historical sugar quotes

The first and largest increase in sugar prices took place as early as 1974. In December 1973, the rate broke the resistance at 10 cents a pound, which resulted in a strong upward trend. It lasted until November 1974, when it reached its all-time high of 61 cents. In the following years, the price did not even come close to this value. After it peaked, a fairly long bear began, culminating in a low of 6 cents in July 1978.

Sugar then hit its uptrend again until October 1980, when it peaked at 45 cents. In the following years there was a decline again, this time to an historically low value of 3 cents per pound, which was maintained from April to July 1985.

The market did not experience such spikes for the next 20 years and was in a consolidation phase constrained by the 5 and 16 cents levels. It was only in January 2006 that he managed to break it over the top and reached 19 cents by the end of this month. It then created a narrower consolidation zone of 9 to 14 cents until June 2009. It was then that it generated a sharp upward move that resulted in an unexpected increase to 30 cents achieved in late January 2010.

Then there was an immediate four-month correction to the level of 14 cents per pound recorded in May. This allowed for an even stronger rise in prices, up to 35 cents, which the rate reached in January 2011.

This was followed by a several-year bear market to the level of 10 cents per pound recorded in August 2015. It was then that the market entered an uptrend for the last time. Prices rose to 24 cents in September 2016. In the following years, the market entered the bearish phase again, lowering the rate again to 10 cents in August 2018.

Historical cocoa quotes

Similarly to the sugar market, the first and greatest increase in cocoa prices took place in the 1970s. It started in June 1975, when the price was around 1000 US dollars per ton. In two years it managed to increase to a historically record value, namely USD 4,878 in July 1977.

The price then dropped steadily over the course of 23 years, to the record low of $ 690 in November 2000. Then the Hossa prevailed on the market and lasted until February 2011, when the rate reached $ 3772 per ton.

Historical coffee quotes

At the beginning, the situation on the coffee market was almost the same as in the case of the cocoa described above. The first and largest rate increase began in April 1975. It lasted exactly 2 years, and the price soared from around 50 to 335 cents per pound. Then the four-year Bessa prevailed from April 1977 to June 1981, when the price hit a low of 86 cents. In the following years, another upward move took place, the increase ended in January 1986 at 268 cents.

Then the market entered a bearish phase again, this time lasting six years, and the price reached a low in August 1992 at 51 cents per pound. This resulted in another strong upward trend, the rate peaked in July 1994 at 239 cents.

Immediately there was a sharp correction and the coffee was again worth below one dollar per pound, the low was 95 cents in December 1995. This resulted in another rapid increase, in May 1997 the price soared to 276 cents.

Then there was a four-year cut to a record low, in October 2001 a pound of coffee was only 44 cents. It was then that the longest uptrend began, which continued until May 2011, when the rate peaked at 308 cents. In the following years, of course, the rate began to decline, this time to 101 cents, which was recorded in November 2013.

Coffee, cocoa and sugar futures

First, a short explanation – futures contracts are a bilateral contract to buy / sell a specific underlying asset for a strictly defined price on a given date . They are standardized instruments, and they are traded on individual exchanges, which also means predetermined underlying instruments, execution dates and contract sizes.

For sugar, they expire four times a year (end of March, May, July and October) and are included at £ 112,000. As for cocoa, we have five expiry dates (March, May, July, September, December) and the value is 10 tons. The coffee expires in the same months as cocoa , and the contract is for £ 37,500.

So, a lot of capital is required . This is because they are traded on a centralized, open market and the broker or brokerage house is only an intermediary. Of course , we don’t have to hold the contract until it expires . We can sell it at the current market price if there is sufficient liquidity in the market. In the event that there is no investor willing to buy it back, the position is closed at expiry at a predetermined price.

The futures market is intended for experienced investors and is speculative in nature. Additionally, it has a leverage of 1:10.

The second way to invest in soft commodities is …

CFDs on coffee, cocoa and sugar

CFDs are the easiest to use and arguably the most popular way to invest in commodities. Their name comes from the English language and is an abbreviation of Contracts for Difference, i.e. contracts for differences .

The CFD market is over-the-counter, which means that the transaction is between an investor and a broker and not in the real market. The CFD contract mimics the movement of the price of the underlying asset. After opening a buy position, when the price of the underlying instrument goes up, we make money on its rise, and the selling side loses, and vice versa.

We do not acquire the asset physically, we only speculate about a change in its price in the future. As in the case of futures, we can place long and short orders on the CFD market, and the financial leverage for these raw materials in Poland is 1:10.

However, their advantage is the other two issues, i.e. the expiry date and the size of the contract. There is no deadline, so you can close your position at any time , as long as the market is open and it is lightning fast, as the broker undertakes to pay the difference in any situation after placing the order.

What’s more, in this case, we can adjust the size of the contract ourselves to the capital and risk management strategies, they are not standardized, so you do not need large funds to start investing on them.

In addition, virtually every broker offers CFDs for coffee, cocoa or sugar, so there are no problems with their availability. Therefore, it is probably the easiest, fastest and cheapest form of speculation on soft commodities in terms of commissions and spreads.

The last way of investing in the described raw materials presented in this text is …

Options for coffee, cocoa and sugar

Options are an instrument that gives their buyer the right to perform a specific operation. Their characteristic feature is that they can use it, but they do not have to, while the other party to the transaction, i.e. its writer, is already obliged to fulfill the option . The conditions are determined by the exchange and in the case of coffee, cocoa and sugar they are the same as for futures contracts. There are two types of options – buy and sell. It should also be added that they also allow the use of financial leverage. So far this market is very similar to the futures market, what’s the difference?

In the case of options, we additionally pay an option premium, which is basically the cost of purchasing this instrument . However, as mentioned above, there is no obligation to do so. So, if the price of a commodity moves in the opposite direction than expected, we do not need to activate the security until it expires and we only bear the cost of the premium . Of course, they can be made at any time before that date. So the risk of loss in this case is known at the beginning of the trade and the potential profit is practically unlimited .

Is it worth considering investing in soft commodities?

Investing in soft commodities , due to the volatility and the variety of instruments offering speculation in this market, can be a great idea, which may turn out to be an opportunity to generate large profits.

However, the best solution in this case is to trade in the long term, and this method is easiest available on the CFD market. Moreover, they have the lowest fees of all three instruments, the fastest execution, reliable market liquidity, and do not require a large deposit to trade.

Therefore, contracts for difference are a recommended form of investing in coffee, cocoa and sugar , especially beginners should focus on them.