Soft Commodities - What Are They?
Most CFD traders in the UK relate commodities to the harder metals and oil issues, but many CFDs are available in the important area of 'softs'. This sector generally refers to commodities that are grown instead of being mined, and this brief paper describes the background and factors that affect supply and demand.
The main 'softs' are as follows:
Sugar
This is a form of carbohydrate, of which the most commonly used is the crystal white version, or sucrose, used in flavouring. Sugar sucrose is extracted and refined from sugar cane, sugar beets, or sugar palm.
Most cane sugar is grown in countries with warm climates, such as Brazil, India, (parts of) China, Australia, Fiji and Mexico. It is noticeable that developing countries produced more sugar than developed countries. Beet sugar tends to grow in regions with cooler climates, such as Northwest and Eastern Europe, Northern Japan, and some areas of the US.
In the northern hemisphere, the beet growing season ends with the start of harvesting around September, and harvesting and processing usually continues until March. The availability of processing plant capacity, and the weather, are major influences on the duration of harvesting and processing. It is possible to hold harvested beet until processed, but frost damaged beet cannot usually be processed.
Much of the impetus behind the recent bull market has come from the effects of drier weather on the Brazilian cane market. As with all grown commodities, though, the area planted to cane has been expanding at the expense of other crops such as coffee and oranges, a trend which is expected to continue. The other growing usage has been for ethanol, but this is so far not widely used outside of Brazil.
Cocoa
This is the dried and partly fermented fatty seed of the cacao tree. From it comes chocolate, and it can be powdered into cocoa powder. Cocoa butter also derives from the dark, bitter cocoa solids.
Demand for the cocoa market is generally steady, but supply is often affected by political considerations given the many unstable areas from where it is extracted, especially West Africa.
Orange Juice
The main factors affecting the orange crop are the prevalence of freezing nights, so production has to be in tropical or warm temperate areas. The major exporters of organic fresh citrus in Europe are Italy, Spain and Greece, and elsewhere, Argentina, the US, Brazil, Israel, Costa Rica, Mexico, and Cuba are major exporters.
The major organic citrus juice market is for orange juice, and there has been a rise in "Not from Concentrate" OJ as opposed to frozen canned OJ in recent years.
The main supply determinants are climatic. The later in the winter a freeze occurs, the less damage there is as early and mid-season varieties are already mostly picked off the trees and for instance in Spain, Valencia oranges are mature enough that many can be salvaged if processed immediately. Cooler, but not freezing, temperatures can actually be beneficial for the crop as it promotes good colour.
Lumber
Lumber is wood that has been cut into boards or other shapes for the purpose of woodworking or construction, and it is supplied in rough form or finished. Rough lumber is the raw material for furniture making and other items requiring additional cutting and shaping. Finished lumber is supplied in standard sizes, mostly for the construction industry, and is primarily one of a few needle-bearing species such as pine, hemlock, fir or spruce.
The main market is Dimensional lumber which is a term used in the US for lumber that is finished or planed and cut to standardized width and depth spcified in inches. In Europe the sizing is slightly different.
Although lumber is often a localised market product, it goes without saying that demand is heavily linked to the health of the construction industry worldwide.
Cotton
This is the fibre that grows around the seeds of the cotton plant, and which results in a spun textile which is soft and highly breathable. The major producers of cotton in are China, India, the US, Pakistan, Brazil, Uzbekistan, and Turkey.
The big question for longer term investors in cotton's bull market is simply how much China and lesser Far eastern producers can effectively become self-sufficient, and lessen the historic export demand from the US, where the market has traditionally been based.
Strong price advances have now began to influence farmers' plantings decisions and encourage an even greater expansion in the area sown to cotton in these countries. The International Cotton Advisory Committee forecast that world plantings would rise about 3% in 2006-07 with much of the expansion to take place in mainland China and India.
Because of more prevalent use of better seed varieties that are disease resistant, more than likely above average yields will continue to be seen, unless there is some unusually bad weather in key growing areas, so this is a fascinating market to follow.
Coffee
Coffee is one of the world's major commodity crops and a major export of some countries.
The two main cultivated species of the coffee plant are Coffea canephora (robusta) and Coffea Arabica (arabica), of which the latter is considered more suitable for drinking as it is less bitter and more flavourful.
Around three quarters of worldwide cultivation is Arabica, but robusta is less susceptible to disease than and can be cultivated in environments where arabica does not thrive. Robusta coffee contains about 40-50% more caffeine than arabica, and is used as an inexpensive substitute for arabica in many commercial coffee blends.
Most arabica coffee beans originate from Latin America, East Africa, Arabia, or Asia. Robusta coffee beans are grown in West and Central Africa, throughout Southeast Asia and Brazil.
The sugar market came to life in 2005, and coffee followed shortly afterwards, with growing demand not matched by increase in supply, as many developing nations become more affluent and increase their coffee consumption.
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