They build, fuel and feed the planet,

but commodities are frequently

overlooked by retail traders. By getting

acquainted with markets the global

economy depends on, investors can tap

into a new world of opportunities.

commodities:

STRIKE
WHEN
IT’S HOT

01 02 03 04
Sponsored by A world of Black MIning new Going
commodities and Gold trading soft
opportunities
Pages 1 - 4 Pages 5 - 7 Pages 8 - 11 Pages 12 - 14
01
A world of commodities
E very day, we depend on a huge
variety of natural materials to
conduct our lives. We wake up on
cotton sheets, draw water through
copper pipes, cook on gas stoves
with steel and aluminium utensils,
drink coffee or tea with sugar, eat rice
and wheat-based foods and drive
petroleum-fuelled vehicles.
Collectively, these materials are
known as commodities, and they
form the bedrock of the global
economy. And yet, despite our
dependence on these resources,
most of us think very little about
them. Similarly, in the world of
financial markets, many investors
overlook the opportunities presented
by commodity trading in favour
of other, more headline-grabbing
assets.
In fact, with the exception perhaps
of gold, the mechanics of many
commodity markets are simpler
to follow than their equity, bond or
foreign exchange counterparts.
They are also typically more volatile,
making them ideal opportunity
generators for well-prepared traders
who take the time to understand the
benefits and risks involved.
Once the preserve of institutional
traders with deep wells of capital,
nowadays retail investors are able
to trade oil, gold, cotton, copper or
coffee with relatively modest sums.
Commodity market basics
The commodity trade is the world’s
oldest market, dating back at least
6,000 years. Until relatively recently,
this trade was all physical; the buyer
would take possession of goods from
the seller. These days, the majority
of commodity transactions on world
markets are “paper” trades. In other
words, buyers and sellers have no
desire to exchange 5,000 bushels
of wheat or 1,000 barrels of crude
oil; they are speculating on the
prices of these commodities for the
purposes of profit or hedging (which
is discussed in the next page).
Commodities are classified into two
broad types:
Hard – those that are extracted or
mined, such as precious metals,
base metals and oil.
Soft – those that are grown or farmed,
such as coffee, livestock or rice.
There are hundreds of commodity
exchanges around the world.
There are general exchanges,
such as those in Tokyo and Dalian,
and exchanges that specialise
in commodity types, such as the
London Metal Exchange or Chicago
Board of Trade. Most of the trading
on these exchanges is in the
form of derivatives (a tradable
contract whose value is based on
an underlying asset) speculating
on future prices – such as futures,
forwards and options – or spot
contracts based on current prices.
Advantages
For investors looking to expand
their portfolio of traded assets,
commodities offer several
advantages:
Volatility – Often described as the
trader’s friend and the investor’s
enemy, volatility refers to the
degree of instability in the price of
a particular asset. For someone
looking to hold an asset for long-term
appreciation, volatility is a source of
unwelcome stress (think of Bitcoin
owners, who can see thousands of
dollars wiped from the value of their
holdings in a single day). If you are
trading derivatives such as Contracts
for Difference (CFDs), volatility
presents the opportunity to benefit
from regular price swings by going
long or short on the same assets.
Commodities are historically much
more volatile than stocks, bonds
and currencies – for reasons we’ll
examine shortly.
Quarterly historical
volatility range
(past decade)
Crude oil 13-90%
Soybeans 10-75%
Coffee 11-90%
Dollar Index 4-15%
US Treasury (30yr) 6-17%
S&P500 5-27%
Source: The Balance
Diversification – Along with higher
volatility, commodities have a
historically low correlation to more
popular asset classes like stocks
and bonds – in other words, prices
don’t tend to move in tandem with
Back to Home Page
01
A world of commodities
other markets. This means they have
the potential to become a valuable
portfolio diversification tool.
Hedging – Investors and companies
take positions in certain assets
to protect themselves – or hedge
– against possible future losses.
(Airlines, for example, lock in future
fuel contracts to hedge against
possible oil price increases.)
Traders can use commodities as a
hedge against inflation, since rising
commodity prices are a characteristic
of inflation, which erodes the
purchasing power of currencies and
returns from other investments.
Leverage – Because commodity
contracts can involve large volumes
and high costs (one standard crude
oil contract at US$70 per barrel
is US$70,000), investors trading
derivatives like CFDs can use
Oil - US Crude (SD1)
Daily
MA 20 50 100
-3038.1 -59.34% H 5465.8 L 725.7 Sat 8 Feb 2020 - Fri 1 May 2020
Crude oil prices collapsed in the first few months of 2020 as the global pandemic crippled travel demand.
Source: IG
leverage, which requires a much
lower capital commitment. This can
amplify returns from winning trades
but can also inflate losses very
rapidly, so traders need to employ
defensive strategies and tools to
protect their investments.
Market drivers
Anyone who has spent time trading
stocks, bonds or currencies will be
familiar with the often confusing way
these markets sometimes behave.
While all financial markets can
behave illogically (if they didn’t, it
would be easy!), commodity markets
tend to be more reliable in following
the fundamentals of supply and
demand.
We will look at specific commodities
in the following sections of this
guide, but first it’s worth becoming
familiar with the fundamental market
-107.1 -1.49% H 7212.9 L 7062.6
drivers that professional traders
track on a daily basis. All successful
traders work to a plan, and
regular monitoring of your market
environment is an essential part of all
trading plans.
The core of commodity pricing is,
of course, supply and demand. The
most stark recent example of these
basic market forces at work is the
dramatic collapse of crude oil prices
in 2020, as global travel ground
to a halt in the early months of the
COVID-19 pandemic.
Commodity prices respond in the
short term to geopolitical or natural
events, but over longer periods of
time they also tend to move in a
broad cyclical fashion. When prices
are weak for a sustained period,
that discourages investment in
production, which reduces supply.
When supplies fall, prices rise, which
7081.0
6000.0
5000.0
4000.0
3000.0
2000.0
1000.0
0.0
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01
A world of commodities

encourages producers to invest in
more output, which increases supply,
and causes prices to fall again.
Professional traders will be aware of
where their traded commodities are
in this cycle, but they will also keep
a close watch on a number of other
key driving forces behind shorter-
term price movements.
Demand
The global economy: How healthy
is the world economy? Strong
growth fuels demand, which means
manufacturers and producers are
making more stuff. It’s important
therefore to follow the releases of
key macroeconomic data.
Consumer demand: Governments
and intergovernmental bodies (like
the IMF, ADB, and so on) produce
regular data on consumer behaviour.
It’s important to know how trends
in consumer demand for certain
products affect specific commodities.
What is the link, for example,
between car sales and platinum
futures, palm oil and fuel prices, or
meat production and soybean meal
prices?
U.S. dollar: Commodities are
usually priced in U.S. dollars, so
there is a broad inverse relationship
between the strength of the dollar
and commodity demand (see
chart below). When the dollar is
strong, fewer dollars are required to
purchase commodities, and more
expensive U.S. supplies force a
repricing to match global competitors,
so prices fall.
Substitution: Some commodities
such as grains and some metals can
be substituted for one another in
industrial and food production (such
as aluminium for copper, palm oil for
soybean oil). When one commodity
becomes more expensive, producers
might substitute it for another,
increasing demand and boosting
prices.

180

Last Price

160 DOLLAR INDEX SPOT (R1) 89.869 120

Bloomberg Commodity Index (L1) 78.6378

140
100

120 89.869

80
100

80
78.6378 60

60
40

2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

As the Dollar Index strengthens, the Bloomberg Commodity Index tends to drop.
Source: Bloomberg

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01
A world of commodities

Supply
Global Soybean Production by Year
Weather: It may seem obvious,
but weather has a major impact on
366.74
agricultural output. Which countries
World Soybean Production
350
or regions are key suppliers of
which soft commodities? Are those

Millions of Metric Tonnes

regions experiencing droughts, 300
flooding, natural disasters? Traders
in soft commodities will watch the
news closely for weather events and 250
forecasts that may affect production,
and therefore supply and prices. For
200
example, some researchers1 have
predicted that wetter weather linked
to climate change may cut U.S.
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
agricultural output by US$3 billion by
2030. How might a forecast like this
affect the long-term global supply of
certain commodities?
Global Crude Oil Production by Year
Geopolitical forces: Wars, trade
disputes, political standoffs…these 95000
events can affect the trade policies Crude Oil Production
Thousands of Barrels Per Day
between countries and the supply
90000
lines between them. An attack on two 88391
Saudi Arabian oil refineries in March
2021 caused crude prices to rise to a 85000
14-month high, even though supply
was ultimately unaffected.
80000

Political decisions: Government

policy shifts in major producing 75000
countries can have a major impact
on prices. Some commodities,
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020

most notably oil, are overseen by

international bodies such as OPEC
that make decisions on production.
In the next sections, we will look While the production of many commodities increased over the past two
at the factors affecting specific decades, the increase was not steady due to the supply and demand
commodities, and how to set up factors mentioned above.
Source: Bloomberg
trading plans around those factors.

1
Source: Oxfam

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02
Black and Gold
A sk anyone to identify two
globally traded commodity
markets, and they are likely to name
oil and gold.
On one hand, this is easy to
understand. Oil underpins much of
the world economy and has shaped
global geopolitics for a century. Gold
has fascinated humanity since the
beginning of civilisation. And yet, for
traders, oil and gold are the least
transparent and most difficult to
understand of all the commodities.
They are still highly popular markets,
however, and the emergence of
retail-friendly financial products
such as Contracts for Difference
that offer trading in these assets
without a huge financial commitment
have made them more and more
accessible to non-professionals.
Oil
Oil is a specialist field with an
arcane vocabulary and investing in it
requires an understanding of many
key factors. Like other commodities,
oil prices are on one level a basic
function of supply and demand (or,
just as importantly, the market’s
perception of future supply and
demand). Anyone remotely familiar
with world news, however, will know
that it’s much more complex than
that.
In fact, because oil is so central
to the global economy, oil traders
need to keep up with a bewildering
range of geopolitical developments
that can affect prices and volatility,
from stockpile data and the U.S.
dollar, to OPEC decisions and
refinery shutdowns, to electric
vehicle subsidies and regional armed
conflicts.
Traders also keep a close eye on
whether oil futures are in contango
(when futures are higher than spot
prices, indicating that the market
expects oil to rise over time) or
backwardation (when futures
are cheaper, indicating bearish
sentiment).
Because of its high level of
complexity and volatility, most oil
traders will also use technical
signals to some extent alongside
fundamental analysis to guide their
investment decisions, and it’s highly
Crude oil
1990-1994 1995-1999 2000-2004
Source: Bloomberg
recommended that beginner traders
familiarise themselves with these and
practice using them before starting
(IG’s primers on technical analysis
are a good starting point).
Crude markets have historically
been very trend- and momentum-
driven. Oil (along with gold) is the
only commodity that regularly attracts
the attention of mainstream news.
When a sharp uptrend or downtrend
is established by the institutional
traders who dominate the market, the
resulting dramatic price movement
generates headlines, which draws
in a flood of smaller players, which
accelerates the trend to sometimes
extreme levels (such as the rise to
US$148 a barrel and subsequent
collapse in 2008, or the plunge to
near-zero in 2020).
140
120
100
80
69.27
60
40
20
2005-2009 2010-2014 2015-2019 2020-2024
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02
Black and Gold

Ways of trading crude: Investors
wanting to explore crude markets
have the choice of futures, options,
investing directly in oil company
stocks, buying into exchange-traded
funds (ETFs), or trading derivatives
like CFDs. The first two channels
require deep reserves of capital
because of the crude’s large contract
sizes, while the next two channels
are ideal for investors seeking long-
term capital appreciation.
The last channel on CFDs
enable retail traders to tap into
the opportunities inherent in oil’s
volatility, and trade either spot
prices or futures. They also enable
investors to take positions in more
flexible sizes, from a standard future
size to a mini and even a micro-sized
contract. There are no expiry dates2,
so the investor can maintain the
position without having to manage
rollovers (though there are overnight
funding charges). As a leveraged
product, CFDs enable investors to
have the potential to increase the
power of their investment capital.
This also leaves you open to
greater losses if markets go against
you. Employing risk-management
strategies such as Stops,
Guaranteed Stops and Limits not
only reduces the chance of heavy
losses, it also cuts your margin
payment.
Gold
Gold is the most confounding
commodity. It has limited practical
uses in the modern economy (unless
you count jewellery as a practical
use), and since the end of the Gold
Standard in the 1970s the metal
hasn’t underpinned the global
monetary system. So why have gold
prices continued to appreciate since
then, and why is its investment status
undiminished despite countless
predictions of its demise?
The answer is that gold is still
associated with both wealth and
Technical analysis is used to
identify market trends to help
traders forecast and capture
opportunities within the
market. Learn more in our free
e-book: Getting Technical –
A Guide to Trend Trading

Spot Gold (SGD1 Contract) -0.84 -0.05% H 1786.17 L 1770.49

2000.00

1800.00
1780.68

1600.00

MA 20 50 100 1400.00
207.09 13.16% H 2075.32 L 1451.28 Thu 9 Jan 2020 - Tue 17 Aug 2021

Safety first: During the COVID-19 pandemic, gold confirmed its status as a “safe-haven” asset.
Source: IG

2
Unless expressly agreed otherwise with IG, positions on futures CFDs will be rolled over to a later date by default, details of which can
be found in the product details. Where a client has agreed with IG to expire index futures CFDs, IG will do so on specific future dates,
with cash-settlement as shown in the product details.

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02
Black and Gold
safety; an asset that can be stored
away and hold or increase its value
in times of trouble. Sceptics need
look no further than the performance
of gold during the COVID-19
pandemic, when the price surged
from around US$1,400 an ounce in
February 2020 to almost US$2,100
by August – even after stock markets
had recovered from their slump
early in the crisis. Nervous investors
instinctively reach for security – and
that means stable government
bonds, strong currencies, and gold.
Gold also defies correlation, making
it a valuable tool of diversification.
Over time, it has moved against
the dollar, in tandem with crude
oil, inversely to interest rates, and
opposite to stock markets. But
it has never reliably maintained
these trends. In the absence of any
concrete fundamental drivers, traders
use technical indicators to bolster
their market analysis and underpin
trading decisions.
Nevertheless, gold has cemented
its place as a safe-haven asset and
a hedge against market uncertainty
and volatility. A 2016 study by
ETF Securities concluded that re-
allocating just 10% of a standard
stocks-and-bonds portfolio from
equities to precious metals improves
annual return by 13% and reduces
volatility by 8%. A portfolio including
gold outperforms a simple 60/40
stock-bond portfolio mix — calculated
using the S&P 500 total return index
and the Bloomberg Barclays U.S.
Treasury Total Return Index — by
about 55 basis points per year,
though at the cost of higher volatility.
Ways of trading gold: There are
multiple ways of investing in gold:
buying physical bars or coins and
storing them in a vault, buying
shares of gold mining companies,
investing in a gold ETF or Gold Trust,
speculating on gold futures, or using
CFDs to trade on these indices or
physical gold. A gold CFD places a
theoretical buy or sell order for the
spot or futures contract on a set
amount of metal. There is no physical
ownership, and the cost of trading
is much lower than buying physical
gold, but they are leveraged products
so traders can face substantial
margin calls if bets go wrong.
Traders and investors have
traditionally used gold as a hedge:
against inflation (retaining its value
as the purchasing power of a
currency declines), a weakening
economy, and against a falling stock
market. It’s worth noting, however,
that the effectiveness of gold as
a hedge waxes and wanes at
different times. During the COVID-19
pandemic, for example, gold began
moving in tandem with stocks, so it’s
important for traders to monitor gold
analyst coverage to see what trends
are currently strong.
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03
Mining new trading opportunities
U nlike gold, the other major
metals traded on world markets
have almost exclusively practical
uses. The modern world is built
and run on metals, and because
of this they are often regarded as
the “cleanest” indicators of global
economic health. As a result, they
are also much less prone than gold
to confusing price behaviour, while
remaining volatile enough to make
them an attractive addition to a retail
trader’s armoury.
The IG platform enables the trade
of CFDs in copper, iron ore, nickel,
zinc, aluminium and lead. If you are
not already familiar with the market,
pick one or two metals and focus
on learning about them. The more
you read and follow the market, the
more comfortable you will become
with trading it. It’s always advisable
to spend some time trading a new
asset on a demo platform first, even
if you’re already familiar with trading
other asset classes, because each
market has its own idiosyncrasies.
Nevertheless, there are common
important factors that drive metals
prices, and traders need to monitor
these on a regular basis.
Production and consumption:
Data for each major metal is
released on a monthly basis by
industry bodies (each metal has
a “study group,” such as the
International Copper Study Group)
or media, and monitoring the trends
in this data as well as the global
3
Source: CME Group
supply-demand balance provides a
valuable overview of market health.
It’s important to remember that prices
are affected as much by perceptions
of supply as by actual supply, so
an event such as a labour strike
even in a smaller mine presents
an opportunity to a CFD trader to
anticipate market reaction.
Inventory: The London Metal
Exchange releases data on metal
inventories on a daily basis. As with
crude oil, the trends in this data offer
traders’ important clues. If inventories
are increasing, supply is outpacing
demand, which is likely to depress
prices, and vice versa.
Mines and smelters: The mining
industry is prone to disruption:
natural disasters, accidents, labour
disputes, regulatory uncertainty.
These can all have significant
short-term impacts on prices, so it’s
advisable to follow industry news.
Mining is also not a very agile
business. Unlike farmers, companies
can’t just plant a copper mine when
demand is high. The process of
locating ore bodies and developing
a mine requires huge investments
and many years, and so producers
are exposed to high risks when they
decide to develop or close mines.
“It’s important to remember that prices
are affected as much by perceptions of
supply as by actual supply.”
Following are some key facts about
some of the major traded metals:
Copper
Considered a bellwether for the
global economy, copper is used
for electrical wiring and piping;
electronics and construction account
for almost 70% of demand, so
traders need to keep an eye on data
from those particular industries,
as well as the growth of electric
vehicles.
The world’s largest producer
by far is Chile (note that supply
concentration increases the risk of
market volatility), followed by the
U.S. and Indonesia. The leading
consumers are China, the U.S.,
Japan and Germany. Global supply
doubled between 1994 and 20143
as China boomed, and copper price
performance is heavily linked to the
health of China’s economy.
Iron ore
The key ingredient in steel
production, iron ore plays a vital
and sometimes politically sensitive
role in global trade. Brazil, Australia
and China produce about half of the
world’s output. Unsurprisingly, the
world’s biggest economies are also
the largest consumers: China, the
U.S. and Japan.
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03
Mining new trading opportunities

Aluminium
Aluminium is produced from
bauxite and is heavily used in the
transportation and food & beverage
industries. Australia accounts for
more than a third of world bauxite
mining4, followed by China and
Brazil, but China is overwhelmingly
the largest primary producer and
consumer. Aluminium smelting
requires a huge amount of energy,
demand for a metal that’s in short Africa) dominates about 40% of
supply. Despite the steady rise of world supply, and also because it’s
clean-energy vehicles, demand a secondary product of nickel and
for catalytic converters will remain platinum extraction, which means
strong for some time to come. Even it’s difficult for miners to adjust
so, palladium is prone to volatility, production in response to changing
partly because one country (South demand.
4500
London Metal Exchange LMFX Metals Index 4261.5

and so energy prices affect the 4000

market.
3500
Nickel
Nickel is a key ingredient in stainless
3000
steel, and the top producers are
Russia, Australia, and Canada –
though there are also significant 2500
mines in Indonesia and New
Caledonia. Historically, nickel has
2016 2017 2018 2019 2020 2021
been one of the most volatile metals.
In 2007, it hit a peak of US$50,000
The London Metal Exchange Index, a gauge of global base metal prices,
per tonne before plunging to about
has surged since the start of the COVID-19 pandemic. Source: Bloomberg
US$8,200 in 2009. Nickel is now
an important part of electric vehicle
production.
5000
Palladium
LME NICKEL 3MO ($)
Palladium has been the standout 4000
commodity performer of the last
half-decade, booming from less 3000
than US$700 an ounce in 2017 to
a peak of almost US$3,000 in April 19368.00
2021. Rarer than gold, palladium
is a critical component in catalytic 1000
converters, which transform the
poisonous gases produced by
vehicles into safer emissions.
2000
2001
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2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021

Stricter emissions regulations and

the growing popularity of hybrid
Over the past 20 years, nickel has been one of the most volatile metal
vehicles is driving auto industry markets. Source: Bloomberg

4
Source: CME Group

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03
Mining new trading opportunities

Trading metals
Which metals you choose to trade
may depend on factors such as
familiarity, and trading budget.
Commodity contracts involve large
volumes, so using derivatives such
as CFDs or Knock-outs is a way to
limit your capital outlay on trades.
It is important to know how margin
levels are calculated. With copper
trading at US$9,387 per ton, for
example, a single US$5 Copper Mini
Contract CFD (returning US$5 per
point of movement) still requires a
margin payment of about US$12,600.
The margin on 10 iron ore contracts
returning S$10 per point, meanwhile,
is about S$2,200. For this reason,
many traders choose to use Knock-
Outs instead, which are a limited-risk
trade that gives the trader full control
over margin and risk. You can learn
more about Knock-Outs trading here.
Once you’ve studied your chosen
metals, monitored the market and
practised on a demo platform, you
should be ready for live trading. To
learn more about trading CFDs,
download our free e-book. Here’s an
example of how you might use your
knowledge of the market to inform
your trades.

Trading example:

Eunice has been tracking the copper market, and Copper ($5 Mini Contract) -113.5 -1.2% H 9506.1 L 9327.3
prices have largely been flat for a few days. Then, on
June 14, the government of China, the world’s largest
Daily
copper consumer, announces that it will be releasing
copper from its strategic reserves in order to boost
supply and damp the recent surge in prices. She
decides to sell copper CFDs at the closing price of
US$9,968.8 per ton.

Each contract is equivalent to 25 metric tonnes of

Copper. On IG, the standard contract size is US$25 June 14: Chinese government
announces release of strategic
per point (US$1 per tonne).
copper reserves

The size of her exposure per contract is: number

of contracts (1) x value per point (US$25) x price
(US$9,968.80) = US$249,220. June 15: Market reacts to
news and price falls
If she decides to sell 5 contracts, her exposure would
be US$1,246,100 (5 x US$25 x US$9,968.80). With
a margin requirement of 20%, the margin required on MA 20 50 100
this trade would be US$249,220. However, Eunice -740.6 -7.40% H 10118.8 L 9013.0 Wed 9 June 2021 – Tue 15 June 2021
Source: IG
always uses defensive trading strategies to limit

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03
Mining new trading opportunities

potential losses. Hence, she enters a Guaranteed Stop 50 points away (the minimum distance), ensuring
that she will lose no more than US$6,250 (5 x US$25 x 50 points) if the market moves against her. Using a
Guaranteed Stop also reduces her margin payment to:

(Number of Contracts x Value per point x 110% x Stop distance) + Limited Risk premium

The next day, however, her market analysis proves correct and the news pushes copper prices lower. The
market closes at US$9,549.1. Eunice has made a profit of US$419.70 per contract.

Number of contracts x value per point x US$419.70

= 5 x US$25 x US$419.70
= US$52,462.50

Eunice has made a total profit of US$52,462.50.

Do keep in mind that profits and losses can be hugely magnified compared to your outlay, and that losses can
exceed deposits. Hence it is important to make sure you are trading within your means.

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04
Going soft

S oft commodities encompass any

resource that can be grown,
reared and harvested for use in food,
biofuel or manufacturing. There are
tradeable contracts in everything
from coffee and sugar to lumber
and livestock. With the exception of
coffee, most “softs” markets are less
liquid than their hard counterparts,
but they can still reward retail traders
who are prepared to study them.
The IG platform offers trading in
17 different soft commodity CFD
contracts and 10 Knockouts CFDs.
Be certain to follow IG’s other
guides on CFD trading and technical
analysis before committing capital to
commodity trades.
Like the other commodities, softs
prices are subjected to general
driving forces – weather, seasonality,
the U.S. dollar – but also have their
own characteristics. It is particularly
important to understand seasonality
factors for softs like cocoa and
soybeans that are dependent on
a small number of major growers.
These follow a broad general cycle
throughout the year (higher prices
out of season, lower prices when the
new crop comes onto the market).

The global centre for soft commodity

Agriculture options and futures - Contracts traded
trading is the Intercontinental
Exchange (ICE) in the U.S., which 2019 2020
standardises contracts. While 2,000
contract sizes for metals and energy 1,600
Millions

are fairly uniform (barrels, US$ per 1,200

800
ounce, US$ per ton), soft commodity
400
contracts are more variable, so take
some time to familiarise yourself with Americas APAC EMEA
contract and pricing standards on a
demo platform before diving in.
Precious metals options and futures - Contracts traded
Soft commodity derivatives including 2019 2020
options and futures contracts 300
are increasingly popular in Asia
Millions

Pacific (see first chart on the right). 200

In China, demand for soybeans 100
doubled over the past decade and
0
now account for around 87% of Americas APAC EMEA
total soybean imports across the
region. In turn, a growing number
of Asia-based market participants Energy options and futures - Contracts traded
are turning to soybean futures to
manage price risk. Meanwhile, 2019 2020
800
Europe accounts for the lion’s share
Millions

of precious metals derivatives, while

energy derivatives trading is on a par 400
across most regions.
Americas APAC EMEA

Source: World Federation of Exchanges

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04
Going soft
Coffee
Coffee comes in two forms: Arabica
(the high-quality bean used in
coffeehouse lattes, espressos etc)
and Robusta (the cheaper, more
bitter bean used in instant coffee and
the coffeeshop kopi of Singapore,
Malaysia etc). Brazil is by far the
world’s largest Arabica producer,
followed by Colombia and Ethiopia.
Vietnam and Brazil produce the most
Robusta. The International Coffee
Organisation (ico.org) provides data
and market analysis on the global
industry.
Arabica is traded in large contract
sizes and is among the most volatile
of soft commodity contracts. As a
result, small price movements can
equate to large profits and losses for
CFD traders.
Contracts
Arabica – New York Coffee C
Futures, priced in US cents per
pound; 35,000 pounds per contract.
Robusta – London Futures, priced
in US$ per metric ton; 10 tons per
contract.
Cocoa
The world’s chocolate supply
depends primarily on production
from two countries: Ivory Coast and
Ghana (followed by Ecuador and
Cameroon). The International Cocoa
Organization (icco.org) provides key
industry information. Prices have
been relatively volatile over the past
decade, trading in a band between
US$3,400 and US$1,800.
Contract: New York Cocoa Futures,
priced in US$ per metric ton; 10 tons
per contract.
Sugar
Sugar is grown in about 110
countries, but 10 dominate global
production (Brazil, India, China,
Thailand, Pakistan, Mexico,
Colombia, Indonesia, the Philippines
and the US), as well as the EU bloc.
In terms of volume, sugar is one of
the most heavily traded “softs” in
the world, with trade forecast to be
worth about US$53 billion by 2022.
The International Sugar Organization
(isosugar.org) is the official source of
industry information. As well as the
usual weather and inventory data,
prices are affected by subsidies,
health trends and ethanol demand.
Price volatility is high, swinging
between about US$31 and US$8.63
over the past decade. You can learn
more about trading sugar from IG’s
sugar guide.
Contract: New York Sugar No. 11
Futures, priced in cents per pound;
112,000 pounds per contract.
Soybeans
Soybeans are not only a staple food
around the world (think tofu, miso,
milk, soy sauce), but they are also
used to produce cooking oil (soybean
oil), animal feed (soybean meal)
and biofuel. Each of these uses is
so significant that they have their
own contracts (except for biofuel),
each requiring a different area of
specialisation. Brazil and the US
heavily dominate world production;
China and the US are the largest
consumers. Corn and soybeans
are grown in similar conditions,
so farmers will often decide at the
beginning of a growing season which
crop to favour, affecting the outlook
for supply and prices. Industry news
portals such as agricensus.com
carry news that helps traders stay
informed. You can also learn more
from IG’s soybean trading guide.
Prices have traded in a band of
US$17.58 and US$8.09 over the
past decade.
Contract: CME Soybean Futures,
traded in U.S. cents per bushel;
5,000 bushels per contract.
These are some of the major traded
soft commodities, but investors can
also access markets in Corn, Palm
Oil, Wheat, Lumber, Cotton, Cattle,
Orange Juice and Rice through the
IG platform.
Before trading
As always, spend time on a demo
platform before committing your
own capital to a particular market.
Study IG’s other learning materials
on trading CFDs and defensive
strategies, volatility and basic
technical analysis to ensure you are
fully equipped to manage the risks of
trading leveraged financial products.
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04
Going soft

Trading example:

Winston has been studying the soybean market and Soybean contract seasonal cycle
knows that the US summer is a key period for the
recently planted crop. Growing conditions during Old crop

summer are crucial to how the market perceives

future supply when the crop is harvested between
Price

September and November. In June 2021, the US

Corn Belt (we noted above that corn and soybeans
tend to be interchangeable) was suffering a period of
wet, cool weather likely to hurt growing conditions. In
China – the world’s biggest importer – the government
Jan

Feb

Mar

Apr

May

Jun

Jul

Aug

Sep

Oct

Nov

Dec
has been talking about reining in speculation on Source: CME
commodities, which has made the market nervous, Soybeans (SD1) -5.1 -0.37% H 1398.0 L 1375.4
while the stronger dollar and rumours of rising interest
rates are also unsettling traders. Daily

Winston has learned from industry and market

sources that June to August is usually the highest
point of the annual soybean price cycle (see chart),
but the market is fearful. Prices have been on a
downtrend since the 20-day Moving Average (MA)
crossed below the 50-day MA and he feels that trend Source: IG
is going to continue.

On June 14, he opens a Soybean Knock-out CFD Bear position at 1422 and sets the Knock-Out level (the
price his position will automatically close if the trade goes against him) at 1433. He decides to buy 100
contracts. His opening premium is:
((Knock-out level [1433] – underlying price [1422]) + Knock-out Premium (2 points)) x margin (1.1) =
US$14.30 x 100 contracts = US$1430.

A small knock-out premium is included in the spread, which means Winston will receive it back if he closes
the trade without being knocked out.

Over the next few sessions, market fears spiral out of control, culminating four days later in the biggest daily
soybean price slump in history. Winston closes his position on June 17 at 1295. His profit is:
(Underlying price [1422] – closing price [1295]) x 100 = US$12,700*

*This calculation is simplified and does not account for overnight funding and other fees/charges – please adjust if
necessary

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