Speculative Influence on ICE Cotton Futures

Cotton futures, like many commodities, are subject to speculative buying and selling.  Participants in the futures market can buy or sell futures contracts with the anticipation of future prices rising or dropping. The most variable type of speculative buying is from so-called hedge funds, comprised mostly of managed private investment money. Hedge funds use various quantitative and other methods to position themselves for anticipated uptrends or downtrends in commodity markets.  Notwithstanding the validity of their technical indicators or buying rules, hedge fund buying appears somewhat influential on prices, particularly ICE cotton in 2021. 

This is depicted in Figure 1 as the upward spikes in the green area, representing the excess of long ICE cotton contract positions (buying positions) held over short positions (selling positions) held.  These green peaks and valleys visually correspond to peaks and valleys in the pattern of nearby ICE cotton futures settlement prices as represented by the red line (Figure 1).  Statistically speaking, simple annual cotton futures price models can be specified to account for the influence of things like USDA’s projected ending stocks-to-use ratio, the speculative net position of hedge funds (in contracts), and outlier years like 2010/11.  The results of these types of models tend to project slightly less than a cent up or down, resulting from a 10,000 contract increase or decrease, respectively, in the hedge fund net long position.  In 2021, from early June to early October, the hedge fund net long position has risen almost 60,000 contracts, which is associated with about six cents of the 24+ cent upward move in ICE cotton futures since June.  (Note:  other potentially influential variables in 2021 include tightening fundamentals and increased index fund buying are not included in the analysis here).

Whatever the quantitative influence of changing hedge fund positioning, it may be useful to take note of the short duration of fluctuations in hedge fund excess buying.  Figure 1 shows many instances of peaks in hedge fund buying that appear to last only a few weeks, as do the associated price rallies.  It seems impossible to predict the change in sentiments, animal spirits, model forecasts, technical indicators, and/or black swan events that will influence hedge fund managers’ positioning in ICE cotton.  So, whatever the influence of hedge fund buying on the cotton market, it is frequently a short-lived phenomenon.

Figure 1. Weekly net position of hedge funds in ICE Cotton Futures and Options (green area) and daily nearby ICE Cotton Futures settlement price (red line). The left vertical axis represents the net position of hedge funds, and the right vertical axis represents the price for the ICE cotton futures settlement prices. 

Source: Commitment of Traders Supplemental Report (Futures and Options)

Robinson, John. “Speculative Influence on ICE Cotton Futures.” Southern Ag Today 1(45.1). November 1, 2021. Permalink