COT update: Record crop longs signal major agriculture rotation

Commodities

In the latest COT reporting week to 5 May, the Bloomberg Commodity Index extended its recent strong run, rising 2.3%, led by gains in energy (+4.5%) and softs (+6.8%), where strong advances in sugar, cocoa, and cotton more than offset minor weakness in precious metals and livestock. Managed money accounts responded by selling into energy strength, with Brent crude seeing a notable increase in gross shorts, while in gold, softer prices within an overall wide range triggered short covering, reducing the gross short position without prompting fresh bearish bets. Elsewhere, the HG copper net long rose for a fourth consecutive week as the key industrial and energy-transition metal continued its strong rebound from the March slump. Prices pushed towards resistance at USD 6.15, a level that was eventually broken last Wednesday, likely triggering an additional wave of buying, the extent of which will only become clear in next week’s report.

Agriculture

In cotton, a 26% rally since late February - driven by U.S. drought concerns and rising synthetic fiber costs amid the ongoing energy crisis - pushed the net long to a two-year high. Cocoa’s 20% surge, driven by emerging El Niño-related production risks in West Africa, triggered only a modest reduction in the net short, with short covering accounting for most of the move while fresh buying remained notably absent.

Meanwhile, ahead of post-reporting-week profit taking, the Bloomberg Grains Index climbed to a two-year high, supported by weather-related concerns in wheat and rising energy-linked demand for corn- and soy-based biofuels. More broadly, the strong recovery and multiple technical buy signals across most of the six major U.S. crop futures have forced managed money back into a sector that for the past two years had largely been traded from the short side. In the latest reporting week, the combined net long surged to a record 847k contracts - the highest since records began in 2006 - with the bulk concentrated in corn and the soy complex. Wheat positioning remained mixed, however, with CBOT wheat flipping back to a net short as elevated contango continued to favor bearish carry trades.

What is the Commitments of Traders report?

The COT reports are issued by the U.S. Commodity Futures Trading Commission (CFTC) and the ICE Exchange Europe for Brent crude oil and gas oil. They are released every Friday after the U.S. close with data from the week ending the previous Tuesday. They break down the open interest in futures markets into different groups of users depending on the asset class.

Commodities: Producer/Merchant/Processor/User, Swap dealers, Managed Money and other
Financials: Dealer/Intermediary; Asset Manager/Institutional; Leveraged Funds and other
Forex: A broad breakdown between commercial and non-commercial (speculators)

The main reasons why we focus primarily on the behavior of speculators, such as hedge funds and trend-following CTA's are:

• They are likely to have tight stops and no underlying exposure that is being hedged
• This makes them most reactive to changes in fundamental or technical price developments
• It provides views about major trends but also helps to decipher when a reversal is looming

Do note that this group tends to anticipate, accelerate, and amplify price changes that have been set in motion by fundamentals. Being followers of momentum, this strategy often sees this group of traders buy into strength and sell into weakness, meaning that they are often found holding the biggest long near the peak of a cycle or the biggest short position ahead of a through in the market.