Soft commodities have typically played second fiddle to the more classic commodity investments such as gold, copper, and oil, but now; after a bull run in the prices of the soft commodities in the past couple of years, many investors are interested in adding exposure to the “softs” to their portfolio.
There are a variety of ways that investors can gain exposure; but one of the best ways is to invest in the agriculture sector as whole. The agriculture sector may experience some volatility, but as the world’s population increases and the amount of arable land decreases, in order to meet global food demand farmers will have to increase yields. Investing in companies that make their money by providing products that increase agriculture output is a smart bet.
In the agriculture sector, the best way to increase output is to fertilize; therefore, the first method of investment in the soft commodities that we will examine is fertilizer companies. There are dozens of fertilizer companies, of varying market caps, and varying degrees of specialization. The key is to look for companies producing phosphates, potash, and/or nitrogen. Some examples include: Potash Corporation of Saskatchewan (NYSE:POT), Agrium (NYSE:AGU), and Mosaic (NYSE:MOS). There are also many junior-sized exploration companies participating in the fertilizer and agriculture sector.
Beyond fertilizer companies there are many other stocks to consider to gain exposure to the soft commodities market. Other possible investments include chemical companies, farm equipment manufacturers, and seed suppliers. Examples of other stocks related to the agriculture sector include: John Deere (NYSE:DE), Monsanto (NYSE:MON), DuPont (NYSE:DD), Bunge (NYSE:BG) and Archer Daniels Midland Company (NYSE:ADM). Monsanto and DuPont produce seeds. Bunge Limited and Archer Daniels Midland Company are global agribusiness companies involved in the production and sale of agricultural commodities.
Soft Commodity Futures
For the most direct exposure to the soft commodities market, investors can buy futures. The futures market, however, is not for the hobbyist investor. Contracts are bought in lots, whose measure varies across the soft commodities, and are subject to specific closing deadlines. Futures are fairly complex, and an in-depth explanation is beyond the scope of this piece. Dealing directly with futures is extremely high-risk, so it is best to consult with an expert if this is the route you want to take. The Chicago Mercantile Exchange offers the largest selection of soft commodity futures. There website offers a wealth on commodities futures information, from lot size to expiration dates for each of the soft commodities. Also, the GEOnomic investing team is currently working on in-depth features for the most popular soft commodity investments.