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, 2014).   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.

Here is is an historical chart of the CFTC data for hedge funds and index funds, matched against ICE cotton futures.  It visually shows the apparent influence of the speculative net position on the cotton market.  The most recent weekly (Tuesday June 11) snapshot of speculative positioning showed an increase in short positioning, but not from long liquidation.  The hedge fund long position was barely changed week over week (+366 contracts).  However, the hedge fund shorts showed a net increase of 11,251 hedge fund shorts, compared to the previous week.  The Index Fund net long position increased by 5,913 contracts week over week, reflecting speculative long positioning.  So the week was a mixed bag.

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