Tips for trading food commodities: Wheat, soybeans, cocoa and more

Soft commodities could be the best performing asset in 2022. Here’s what you need to know.

With global inflation reaching a four decade high and share markets continuing to reprice themselves, it’s little wonder that commodities are shaping up as the best performing asset in 2022.

For the first time in a decade meaningful inflation has returned. And while it can be a shock for investors, especially those in growth shares, it does not mean markets as a whole will fall.

In fact, the race to defensive assets is on, with rising inflation, conflicts in Ukraine and a surge in government spending seeing commodity prices rise.

But commodities are more than just rocks in the ground. While the Russian/ Ukraine conflict has seen investors focus on gas and oil it’s actually wheat that investors should be keeping an eye on.

“Considering other elements of the market, the conflict in Ukraine is an obvious catalyst to take into account, in particular its effects on the supply of soft commodities”, FP Markets analyst Aaron Hill said. “Russia, as well as Ukraine, are large exporters of soft commodities.”

Back in February, FP Markets added a new range of soft commodities that can be traded via MetaTrader 4 and 5.

What is causing inflation to spike?

Let’s start with the problem at hand.

Most economists would agree inflation is back and it’s not transitory.

Following years of subdued inflation, a combination of conflicts in Ukraine, bottlenecks in supply chains and a spate of global stimulus packages has seen prices on everyday items soar.

In the United States it appears inflation has peaked at 8.3%, while Australia which currently has an inflation rate of 5.1% experienced a quarterly inflation spike of 2.1%, putting pressure on our markets.

But the problem is not isolated, with much of the Western World now lifting rates.

Combined, these three factors have seen United States inflation sit at 8.5% over the last 12 months, while in Australia it’s 5.1%, although quarterly figures show inflation spiked to 2.1%.

Not only are rates rising, on Wednesday, 4 May, the Fed made the call to lift rates by half a percentage point, its biggest increase since 2000, as America continues to battle inflation.

At the time Federal Reserve Chair Jerome Powell sent a message directly to the American people, pointing out the pain caused by rising inflation while warning of economic damage in slowing down inflation.

“Yes, there may be some pain associated with getting back to that,” Powell said. “But, you know, the big pain is in not dealing — over time — is in not dealing with inflation and allowing it to become entrenched.”

This spiking inflation rate worldwide is set to not only impact real asset prices, but help drive commodity assets throughout 2022.

What are soft commodities and how do they differ from hard commodities

When investors talk about commodities, they are usually broken up into two categories, hard and soft.

Hard commodities: When you think mining, think hard commodities. Generally speaking hard commodities include natural resources that are extracted, including gold, copper, nickel and oil.

Soft Commodities: On the other side, soft commodities are agriculture and livestock including corn, wheat, coffee, sugar and soybeans.

Over the last couple of months, with the conflict in Ukraine, soft commodities have become front of mind for many investors. While the focus has been on spikes in oil prices wheat is actually one of the most impacted commodities. This is because Ukraine alone produces 6% of the world’s food calories traded.

At the same time, Russia is one of the world’s largest exports of wheat, providing more than 17% of the soft commodities sold worldwide.

Tips for trading soft commodities

To help traders begin with soft commodities, Hill has provided 4 handy hints for investors.”

1. Work with a well-defined trading plan: Hill highlights the importance of having a plan and sticking with it. “This is a blueprint to guide you from point A to B as safely and as effectively as possible. A good trading plan incorporates everything necessary to function as a professional trader, whether trading soft commodities or any other asset class,” he explains.

Many brokers offer a trial account so you can test your trading strategies. For instance, FP Markets offers a free 30-day demo account with $100k USD virtual funds to grow your experience, prior to trading live.

2. Seek trending markets: According to Hill, new traders often pursue short-term opportunities which can prove problematic for those with a little less experience.

“Trading with the trend’ has demonstrated to be an effective, yet simple, trading approach,” he said. “A new trader could begin exploring moving average trading systems: a basic approach that offers not only trend identification but also entry and exit crossover signals.”

3. Risk management is imperative: It’s vital to understand your personal risk tolerance before starting. “First and foremost, irrespective of the market traded, traders and investors are risk managers.”

4. Don’t overload your trading charts: While charts are an important part of trading, investors can overcomplicate trading.

The trader notes “5 indicators are unlikely to provide any more information than 2 indicators,” he explains. “The best traders work with a simple approach of usually no more than 1 indicator per chart,” Hill concludes.

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