Soft and hard commodities

The first question to ask about a commodity is whether it was grown or dug up, because almost everything else follows from the answer.

Soft commodities are perishable agricultural products — the workbook names corn, wheat, coffee, cocoa, sugar and soybean. They have a sowing season and a harvest season, they rot, they depend on the monsoon, and their spot markets are mandis scattered across the country.

Hard commodities are natural resources that are mined or processed — crude oil, gold, silver. They keep indefinitely, they trade against a global benchmark price, and their spot references come from international markets rather than from a village auction.

Every rule in the paper that treats agri and non-agri differently is, underneath, this distinction.

Indian exchanges group the commodities they list into four categories, which is not the same as the two-way soft/hard split:

The regulatory consequences of being soft rather than hard run right through the paper:

Seasonality is the other half of the distinction. Agricultural contracts are monsoon-based or winter-based depending on the crop — wheat and guar are winter crops; maize is produced year-round, so contracts exist in both seasons for delivery in the respective benchmark markets.

A trader runs two positions on the same morning.

Position 1 — a hard commodity. One lot of gold futures, lot 1 kilogram, at Rs 50,000 per 10 grams:

Contract value = Rs 50,00,000
DPL band (NSE gold, 3% to 6%)  = Rs 48,500 to Rs 51,500 per 10 g at the opening limit
CTT on the sale leg, 0.01%     = Rs 500
Delivery default penalty, if short and unable to deliver = 3% = Rs 1,50,000

Position 2 — a soft commodity. One lot of guar seed futures, lot 1 MT = 10 quintals, at Rs 4,050 per quintal:

Contract value = Rs 40,500
DPL band (4% opening limit)    = Rs 3,888 to Rs 4,212 per quintal
CTT                             = nil, guar seed is unprocessed agricultural produce
Delivery default penalty, if short and unable to deliver = 4% = Rs 1,620

Same trader, same exchange, same day — and different circuit limits, different volatility floors, different penalty rates, different trading hours, and a transaction tax on one but not the other.

Note the CTT subtlety. Guar seed is unprocessed and exempt. Guar gum, derived from it and also listed, is processed — and CTT is payable on it at 0.01% of the traded value on the sale.

Chapter 1 (Introduction to Commodity Markets), section 1.2, for the definition, and section 1.3 for the four Indian groups. The classification itself is a one-mark question ("perishable agricultural products such as coffee and cocoa are ____ commodities"), but the reason to learn it properly is that agri-versus-non-agri thresholds appear in Chapters 2, 6, 7 and 9.

• Soft/hard is a two-way split; the Indian exchange grouping is four-way. Bullion, Metals, Energy and Agriculture — do not answer "soft and hard" to a question about how Indian exchanges group commodities.
• Softs are perishable and grown; hards are mined or processed. Rubber is listed under Agriculture and is a perennial crop, not a mined resource.
• Agricultural thresholds are the tighter ones almost everywhere — tighter circuit limits, higher volatility floors, higher default penalty, lower ADTV requirement.
• CTT exemption tracks processing, not the agri label. Sugar, guar gum and soya oil are agricultural and taxable.
• Energy includes electricity, which is cash settled with no physical delivery and no transmission scheduling — a hard commodity that behaves like a financial one.
• Maize is the seasonality exception: produced throughout the year, so contracts run in both seasons.