Speculative money has boosted cotton futures prices in recent months. The speculative fund sector includes “hedge funds” or “managed money” that either buy or sell commodity futures contracts in anticipation of uptrends or downtrends. Thus there are periods when more of these trend followers are short than long. This is shown for cotton futures in Figure 1 when the teal colored area spikes downward below the zero line. The other type of speculators are large institutional “mutual fund” type speculators that buy, hold, and roll commodity futures to track along with popular indexes of commodity prices, such as the Standard and Poor’s–Goldman Sachs Commodity Index, the Dow Jones–UBS Commodity Index, or the Reuters-Jeffries “CRB” index. These “index funds” are always net long, as shown in the darker blue area of Figure 1. When both of these types of funds are net long, the resulting futures buying can pull prices higher than fundamental economics would warrant. Recent history shows examples of that during 2007, early 2010, early 2013, and most recently during the period since Thanksgiving of 2013.
It is not my purpose here to revisit older questions or accusations about how speculators allegedly distort the cotton market. From my standpoint, speculative forces are here to stay, and they appear to act as a catalyst to price movements. They may help you get higher pricing opportunities, but those opportunities may be short-lived.
Since November of 2013, the hedge fund position in cotton futures has varied from almost 6,000 contracts net short (i.e., there were more sellers than buyers) to almost 55,000 contracts net long. The last time we had nearby cotton futures below 80 cents was last November when the hedge funds were net short. Since last December the hedge fund position rose from 25,000 net long contracts to 33,000 contracts by New Years, to over 40,000 contracts in February, to a peak of almost 55,000 contracts in mid-March. Since early February the index fund net long position has risen from over 55,000 contracts to over 62,000 contracts.
Together the increasing speculative fund holdings in cotton futures represent a lot of buying, and nearby cotton futures have marched upward from 80 cents to the lower/mid 90s. Statistically speaking, given the variations in price and total speculative net position since 2013, a 10,000 contract change in the speculative position should give a corresponding 1.67 cent change in nearby cotton futures price, in the same direction. That is just the contribution of fund buying and selling, not commercial buying and selling. Those results suggest that almost 9 cents of the post-Thanksgiving price rally is due to fund buying. Send them a thank-you card for the higher prices, but don’t be too surprised if some unexpected bearishness, perhaps non-cotton or non-ag related causes them to downshift their long positions.
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