The commodities market is vast and one of the oldest trading platforms for traders, hedgers and speculators. It provides opportunities for making superior profits by hedging price fluctuations of the commodities. However, both physical and virtual exchanges of commodities involve high risk due to market volatility. Now let us gauge the dissimilarities between the two broad categories of commodities - Hard and Soft:
Table Of Contents
Difference Between Hard Vs. Soft Commodities
Hard and soft commodities are two distinct forms of raw materials traded in financial markets. The hard commodities are limited and comprise the natural resources acquired from land or ocean through mining and extraction. Hard commodities examples are gold, silver, iron, crude oil and natural gases. In contrast, soft commodities are the livestock and agriculture products that are raised, nurtured, grown and cultivated. Their production is more volatile to external environmental conditions, e.g., cattle, rice, wheat, cocoa, barley and apples.
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Key Takeaways
- Hard commodities comprise natural resources such as metal and energy. On the contrary, soft commodities include agricultural harvest and livestock.
- The hard commodities are extracted and mined from the Earth, but the softs are grown, cultivated, raised and nurtured.
- The former is significantly influenced by supply and demand factors related to industrial production, while the latter is considerably affected by the farming and agricultural production factors.
- The hard commodities are bought and sold on the New York Mercantile Exchange (NYMEX) and the London Metal Exchange (LME). However, the Chicago Board of Trade (CBOT) and the Intercontinental Exchange (ICE) facilitate soft commodities trading.
Comparative Table
| Basis | Hard Commodities | Soft Commodities |
|---|---|---|
| 1. Meaning | Hard commodities comprise natural resources that require extraction or mining from the Oceans and land. | These are the primary goods like harvest and livestock which are produced through a proper process like cultivation and nurturing. |
| 2. Consists of | Metals and energy | Agriculture and livestock |
| 3. Examples | Hard commodities examples include metals like gold, copper, iron ore, aluminum and lead; and energy such as crude oil, natural gas and coal. | It comprises agricultural goods like wheat, rice, corn, millet, barley, cotton, rubber, coffee and orange juice; and livestock such as cattle, pork bellies and hogs. |
| 4. Process involved | Extraction and mining | Growing, cultivating, raising and nurturing |
| 5. Serves as Raw Material for | Industrial sector; for instance, crude oil is used as a raw material in the fuel industry | Food and feed sector; for example, coffee is a raw material for the beverage industry. |
| 6. Perishability | These are sustainable resources. | These are easily perishable items. |
| 7. Storage | It can be stored or preserved for a long period. | It needs to be quickly consumed due to its short shelf life. |
| 8. Demand | Its demand changes as per the global economic growth scenario and industrial production. | Its demand is directly linked to the growth of the population and food preferences. |
| 9. Price Volatility | The price level changes, especially when geopolitical events hit the market. Thus, the hard commodities market is less volatile in the short run. | The price of soft commodities fluctuates significantly in the short run due to supply chain issues, widespread diseases and climate, weather or environmental changes. |
| 10. Supply and Demand Predictability | Since the supply and demand of hard commodities are usually stable, it is easy to predict the same. | It is comparatively more difficult to anticipate the supply and demand of softs due to their higher degree of volatility. |
What are Hard Commodities?
Hard commodities are the non-replenishable or natural resources that cannot be manufactured but are extracted, refined or mined from the land and Oceans. These are non-perishable commodities with a long shelf life. Although nature has a limited reserve of these resources. These commodities include:
- Metals - Base metals like iron ore, aluminum, lead, copper, zinc, and mercury; and Precious metals such as gold, silver, platinum, and palladium.
- Energy - Natural gas, crude oil, electricity, coal.
Hard commodities are used in the industrial sector as raw materials. Also, these are virtually bought and sold like the other stocks on the commodity exchanges, such as the New York Mercantile Exchange (NYMEX) or the London Metal Exchange (LME). The price fluctuation of these items is subject to global supply and demand and macroeconomic factors like interest rates, industrial production, GDP growth, etc. Also, these commodities often have low volatility in a short period. For example, the price of coal is affected by factors like availability, depletion, demand and industrial use.
What are Soft Commodities?
Soft commodities are human-produced primary goods, including agricultural harvest and livestock. The softs are grown, harvested, cultivated, raised and nurtured using the standard processes. These are highly perishable items and cannot be stored for long due to their short shelf life. Also, these commodities are available in unlimited capacity and comprise of:
- Agriculture - Softs like cocoa, coffee, cotton, wool, and orange juice; cereals such as rice, barley, millets, corn, wheat, and soybeans.
- Livestock - Cattle such as cows, goats, sheep, fish, honey bees
The production, supply and demand of such commodities are immensely affected by factors such as weather conditions, pest infestations, and geopolitical circumstances. For instance, the price of cocoa is affected by the weather or climate conditions and demand in different regions. Also, these items' prices are extremely volatile in the physical and virtual marketplaces. Soft commodities trading is channelized on commodity exchanges like the Chicago Board of Trade (CBOT) or the Intercontinental Exchange (ICE).
Similarities
Hard and soft commodities are the primary goods that can be traded on various commodity markets physically or virtually. They serve as raw materials for the production of secondary goods. Also, the investors can indirectly benefit from these commodities by buying ETFs, futures contracts and mutual funds that invest considerable capital in the companies engaged in their extraction, mining, cultivation or nurturing. Thus, the commodities market has a high return potential, whether hard or soft.
Also, both hard and soft commodities are influenced by global economic conditions. Moreover, geopolitical circumstances such as wars, trade disputes, and political unrest can lead to price fluctuations of both hard and soft commodities. Say the price of copper can rise due to war conditions in Chile, a major copper producer worldwide. Also, the price of saffron may be upheaval because of political unrest in regions like Iran.
