Investors can make hard cash in soft commodities

Investors can make hard cash in soft commodities, says MR MONEY MAKER Justin Urquhart Stewart

What are soft commodities? 

They are agricultural products or livestock, including corn, wheat, coffee, sugar and soybeans as well as pork and beef and so on. From the earliest days of agriculture, farmers were always trying to get a price for their growing produce as early as they could – or at the very least they were trying to guarantee the price and value they were going to receive. 

Sometimes if it looked as though the price was going to be too low they might not even have bothered to plant the crop. It’s not modern markets, but Roman growers were doing it long before Eddie Murphy traded the ‘OJ (orange juice) market in the film, Trading Places. 

Now with the impact of global warming we are seeing prices becoming far more volatile, and affected by the strained supply chains and this is something we can use to our benefit.

Driving force: Soft commodities are a range of assets just like any other and trading them is regulated

Should I invest and if so how? 

Soft commodities are a range of assets just like any other and trading them is regulated. However, for new investors I would suggest this is not a market to start dabbling in directly. 

Trading is usually done in spot and futures markets. In English – spot markets are associated with real-time prices. 

A soft futures contract is a legally binding agreement for the delivery of your chosen commodity (cocoa, coffee and so on) at a set point in the future at an agreed price. 

Why should I be interested? 

Although this is a well-developed market, I believe it is only for the professional, not least because other factors such as weather need to be taken into account. 

We have increasingly extreme weather conditions across the globe in recent years and this may well have an effect on both the location and yield of future crops. 

There are also other issues to take into account, such as potential supply chain disruption, as has been graphically illustrated over the last few months. However, that does not preclude us from benefiting from investing in this asset class. The key issue is that these commodities do not necessarily behave like ordinary stock markets, although they will affect one another. Thus by spreading your investments over other asset classes you are moving away from concentrating your investments in one area – not all your eggs in one basket!

How can I go soft? 

The most cost effective method of investing here is via the passive ETFs that track various indices. As the US is by far the largest agricultural trading market, it is here we find the best products in my view such as the Teucrium Corn (CORN) and Soybean (SOYB) funds which as their names imply just track the prices of those commodities, or the Rogers International Commodity Index – Agricultural Total Return, where there is an ETN (Exchange Traded Note) that tracks the index of a basket of ‘softs’ and has a cheaper expense ratio of 0.75 per cent. 

So if you have a clear view on demand for these soft commodities, and also take a view on the impact of global warning, here is one of the easiest ways to invest. 

Justin Urquhart Stewart co-founded fund manager 7IM and is chairman of investment platform Regionally.