Net Position of Speculators

The speculative fund sector has had an apparent influence on cotton and other commodity markets in recent years.  This has coincided with the rise of commodities as an asset class, in contrast to stocks or bonds.  One result (or accusation, anyway) is that commodity markets are driven more by outside financial markets than by commodity fundamentals, i.e., the financialization of commodity markets. However, there is no evidence of this to date in fairly rigorous statistical analyses of the cotton market. The specific role of the fund sector on cotton price volatility is discussed further here in an article written in September 2011 for the International Cotton Advisory Commission (used with permission).  During the first quarter of 2014, the funds were associated with about nine cents of the twelve-plus cent rally in cotton prices since November, 2013 (as discussed in this Southwest Farm Press column from April 18).   And now the proverbial rest of the story:  subsequent statistical modeling indicates that the hedge fund positioning was associated with about eleven cents worth of the 24-cent decline in cotton futures between May and September of 2014 (as discussed in this Southwest Farm Press column).

Our only public source of speculative positioning data in the cotton market is the CFTC’s Commitment of Traders report, which is released on Friday and reflects the open interest of speculators on the previous Tuesday. As such, the CFTC data are reported in contracts (roughly 100 bales per contract).  One unique thing about the CFTC report is that it distinguishes the trend-following hedge funds from the buy-and-hold index funds.

The aggregate net long position of index funds is historically small this season.  For the week ending July 7, the Index fund position (always net long) increased a couple of thousand contracts.  The hedge fund position increased over 11,000 contracts to the largest net long position since February 4.  This explains the recent increase in open interest with higher settlement prices.

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