Why you might want to consider investing in ‘soft’ commodities
There’s no doubt that the last two years, in the shadow of the plague, have dramatically influenced the global economy. For this reason, I recently spent some more time analyzing the markets, trying to figure out where they are headed soon, and I can see that the demand for soft commodities is getting stronger — which might come as a surprise to many. So, I researched why it is happening and concluded that this market might probably get even stronger in the future. Therefore, it might be a good time to invest in the soft commodities market. Let me specify my findings.
Stay home and drink coffee
Soft commodities are commodities that can theoretically be produced indefinitely, as opposed to gold and oil, of which there is a limited supply. Here I’m specifically referring to assets such as coffee, cotton, and sugar — products we use in our everyday lives. Till the winter of 2020, these assets used to be relatively cheap overall. However, since the arrival of the COVID pandemic, the prices of all three listed above have skyrocketed. More than two years after the outburst, prices continue rising, albeit in a more subtle manner. The markets for these products are thriving, which may mean good opportunities for us investors.
Let’s have a look at Brazil and India, for example. Brazil is the world’s largest manufacturer of coffee and sugar, with tens of million bags of coffee and hundreds of million metric tons of sugar cane produced in 2019 alone. India is the world’s largest cotton supplier — it produces more cotton than all European countries combined. These two economic superpowers were among the most hard-struck by the pandemic. Naturally, this caused a workforce shortage and the shutdown of factories. This resulted, of course, in rising prices.
The price surge of the three commodities can also be related to the rise in demand. Due to quarantine and remote work, people started consuming more sugar and coffee. On the supply side, these two export giants are still recovering from the COVID aftermath, slowly but steadily. However, these industries currently aren’t able to withstand the increasing demand and will probably continue failing to keep up with the pace in the near future. If I am reading the map right, the result will be even higher prices.
Return of the risk appetite
Another reason for optimism for investors in soft commodities is the constant decrease in the value of the US Dollar, compared to other currencies. That is great news for the soft commodities investors since they are traditionally priced in USD. I expect the prices of soft commodities to continue surging unless something truly unexpected occurs. What is happening to the Dollar? Let me give you a brief explanation related to our topic.
Naturally, investors tend to shift their capital towards safe assets in economically volatile times, like the Dollar used to be. However, nowadays, the global markets have started showing signs of growth and optimism. This results in a rise in risk appetite — motivating investors to take their chances by investing in ‘riskier’ assets and neglecting the Dollar. Moreover, even many conservative investors believe that the Dollar is overbought and are looking for safe havens elsewhere.
New safe havens
The last two years have turned our lives over, and so is true about the economy. Although some countries’ economies have already started showing signs of recovery, the effects of the pandemic are still present and are highly influential. Assets that used to be stable and reliable, such as the Dollar and gold, are losing stability, while assets that were once taken for granted are empowered by the forces of the pandemic-affected fast-changing market.
In these financially volatile and uncertain times, I believe we should protect our investments more than ever. With that in mind, it may be better that we find new safe havens for investments. The market of soft commodities does seem like an option worth considering.