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 hedge funds has been fluctuating a lot recently.  Between mid-November, 2017 and mid-January of 2018, there has been a large 70,000+ contract increase in the hedge fund net long position, which corresponded with a major rally in ICE cotton futures.  While that partially explains the upward movement in prices, it also highlights the risk of price declines should these hedge funds sell down their position, which occurred between January 23, 2018 and February 20, 2018, and again between June 5, 2018 and now.  For the week ending September 11, the level declined to 60,946 contracts.  The following week (ending September 18) it dropped again to 52,092 contracts, and then again by September 25 to 48,692.  This is clearly a slug of long liquidations that likely were associated with the price decline on Tuesday September 18 and since.  By November 27 it was only 27,116.  This is the smallest net long hedge fund position since July of 2017.   The always-net-long index fund position has had a recent static pattern.

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