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Softs/Agricultural/Dairy Commodities – CTRM Considerations


This page has some high level notes about Softs/Ags.  This is intended to share relevant information in the context of CTRM system design.




1) List of Softs/Ags

2) Trading Attributes

3) More on Cocoa

4) Considerations for CTRM system design


1) List of Softs/Ags


Ags’ is short for ‘agricultural’.  Sources seem to slightly differ on what is considered a ‘soft’ versus an ‘agricultural’ commodity, so we are using this as a generic term.  And even including things like dairy products in this list.  i.e., trying to capture the non-energy, non-metals commodities.


Example Commodities

1.1) Coffee

1.2) Cocoa

1.3) Sugar

1.4) Wheat

1.5) Nonfat dry milk

1.6) Soy

1.7) Cotton

1.8) Frozen Orange Juice


See this for a fuller list and for specific grade/contracts:




2) Trading Attributes


2.1) Units

May trade in pounds or MT (metric tons), which is also called ‘tonnes’. 


2.2) Trade Types

Precious Metals will trade as


Options on Futures

Swaps (financial derivative)

Financial Options

Physical Buys and Sells


2.3) Currencies

These are commonly traded in USD and GBP


3) More on Cocoa


3.1) By ‘Cocoa’ we are referring to

3.1.1) Cocoa Beans

3.1.2) Cocoa Butter

3.1.3) Cocoa Powder

3.1.4) Cocoa Liquor


3.2) Cocoa Beans are the original source thing and the others, Butter, Power, and Liqueur are derived from the Beans.  Similar to the way unleaded gas is derived from Crude Oil.


3.2) Cocoa Bean futures are activity traded, and these can be used to hedge market risk.  However, there are no futures contracts for Butter/Power/ Liquor. 


Suppose you need a physical amount of 100 MT per month of Cocoa Butter to make some product, e.g., candy bars, and you need it for the next 12 months, so 1200 MT in total.  Eventually you’ll need to buy the physical product so as to be able to use it in your factories.  In the meantime, to hedge your market risk, you can do so by buying futures in the futures market.  When you later on buy the physical, you can sell your futures (‘unwind’ them) and you will have effectively locked in a certain price. 


The problem is, there are no futures contracts for Cocoa Butter, only Cocoa Beans.  And the price movement is not one to one, so hedging 100 MT per month of Cocoa Butter with 100 MT per month of Cocoa Bean futures won’t work.


3.3) Butter to Bean Ratio

There is a term called the ‘Cocoa Butter to Cocoa Bean Ratio’ (or just ‘Butter to Bean’ ratio) that describes the relevant price movement.  It ranges over time from about 1 to 1 to about 3 to 1.  If, for example, it was currently at a value of 2, that means if you have 100 MT of price risk for Cocoa Butter, then you would need to hedge with 200 MT worth of futures contracts of Cocoa Beans to be fully hedged.  Note that the contract size for Cocoa Butter futures is 10 MT, so that means you would need to buy 20 futures contracts.


4) Considerations for CTRM system design


4.1) Multi-Currency

Need to be able to support pricing base metals in multiple currencies, e.g., EUR, USD, GPB.  Ideally with minimal extra setup and nothing special to maintain on an ongoing basis.


4.2) Price ‘Curve’ – Fewer Months

One of the big differences for base metals versus other commodities is the term structure of its forward curve.  Whereas energy commodities tend to be monthly, i.e., 12 price points per year, for base metals, for softs, there are only 5 actively trades months per year, March, May, July, September and December.


For physical needs, a firm may need physical product (i.e., to run factories) all 12 months of the year.  If a firm needs physical in January and wants to hedge their risk, they would likely buy the March futures contract as it is the next one available. 


CTRM systems need to be able to transform timewise between physical market risk exposure, which may be in one month, and futures month exposure, which may be in a different month. 


Some firms may want to average the futures months, so if you have need for physical product in June, you might hedge partly with the May contract (until it expires) and partly with the July contract.  A CTRM system needs to be able to accommodate this.


This attribute of softs is one of the most notable things that CTRM system designers encounter when designing a system for softs/ags versus energy or other commodities with futures markets for all 12 months of the year.


4.3) Risk Reporting

Besides the time transformation between market risk on physical versus futures contract, also need to take into account the ‘ratios’ (butter to bean, powder to bean, liquor to bean) in any risk reporting.  Reports need to be clearly labeled as showing either

4.3.1) Physical volumes, e.g., 100 MT Cocoa Butter physical

4.3.2) or… Futures equivalent volume.  E.g., with a butter to bean ratio of 2.1, the above would be 210 MT equivalent of Cocoa Bean futures.




Introduction to CTRM

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