10 Facts for Spread Betting on Soft Commodities

You can spread bet on the future price of Soft Commodities (Softs) like Coffee and Soybeans just like you can spread bet on the future price of Crude Oil, Gold, the FTSE 100 etc. Soft Commodity prices can rapidly increase on the back of high oil prices due to increased transport and energy costs. Prices are also affected by adverse weather conditions and political policies that force farmers to grow certain types of crop. But if you are spread betting on Softs what about the facts?

10 Facts for Spread Betting on Soft Commodities

1)One key factor affecting most Softs is the exchange rate. Because soft commodities are normally traded in US Dollars that means Soft futures prices will be affected by the exchange rates. If there are no other particular influences on supply and demand then if the Dollar goes down against the Euro, the commodities price (in Dollars) will go up and vice versa. This is not always guaranteed but it is an important correlation to take into account.

2)Some of the main soft commodities that you can trade with the major spread betting companies: Cocoa, Coffee, Corn, Lean Hogs, Live Cattle, Oats, Soybean, Soybean Meal, Soybean Oil, Wheat and Sugar. Note Soybean (US) and Soya bean (UK)

3)Commodities are often split into their main types eg Coffee is traded as higher quality Arabica (or Coffee ‘C’) and lower quality Robusta

4)As mentioned above, Softs are generally traded in Dollars, one of the exceptions is Cocoa (London) which is traded in Sterling

5)When spread betting on the future price of Softs the settlement date of your futures trade is normally in 1-3 months. Eg for wheat the settlement months are listed as March, May, July, September and December. The Wheat September market closed on 20 August and the Wheat December market closes on 19 November

6)You can spread bet on all commodities including softs tax free* and commission free with companies like FinancialSpreads.com and IG Index

7)As with all spread bets you trade in units eg with the Wheat (London) market you trade in £ per tonne, Coffee Robusta is $ per tonne.

The current spread for Coffee Robusta is $2196 - $2204. That means you can spread bet on Coffee to close lower than $2196 per tonne or higher than $2204 per tonne.

If you were betting £2 per dollar and the price of a tonne moves $20 then your profit / loss would alter by (£2 per dollar) x $20 = £40.

8)Although the units the commodities are traded in on the exchanges is fixed, when spread betting on commodities you trade in the currency that suits you eg Pounds per unit, Euros per unit or Dollars per unit

Eg Coffee Arabica is traded in 0.01cents / lb (pound).

Therefore you could bet 5 euros per 0.01 cent that Arabica goes up or down. If the price / lb then moved by 0.15 cents then your profit or loss would alter by 5 Euros per 0.01 cent x 15 = 75 Euros.

Likewise you could bet £8 per 0.01 cent that Arabica goes up or down. If the price / lb then moved by 0.20 cents then your profit or loss would alter by £8 per 0.01 cent x 20 = £160.

9)If you are still unsure how the mechanism works then companies like FinancialSpreads.com offer free demo accounts with a virtual £10,000. There you can trade Coffee, Corn, Equities, Forex etc on a copy of their trading platform

10)Note that Interest Rate changes can have knock on affects. Of course we all know the past performance of a market does not always predict the future performance. However in 2008 when the USA was lowering Interest Rates that caused weakness in the Dollar. That therefore increased the price of the soft commodities that were priced in USD. The lesson here is simple. Beware of interest rate changes when you are trading commodities

Spread bets carry a high level of risk to your money and may not suit all forms of investor. You can lose more than your initial investment so make sure you only speculate with capital that you can afford to lose. Likewise make sure you understand the risks involved and seek independent financial advice where necessary.

* Note that tax law can change and can differ if you live outside the UK.

Article Source: http://www.articleselections.com

A leading financial journalist based in the heart of London. Peter Jones is a seasoned writer on the UK spread betting and spread trading account

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