COT update: Agriculture buying surges while dollar longs face a reality check

Commodities

In commodities, the latest reporting week to 18 August covered the period leading up to last Wednesday’s surprise US Treasury bond buyback announcement, which subsequently triggered a rush into hard assets, particularly precious metals, while the accompanying dollar tumble provided broader support across commodities.

During the reporting week itself, the Bloomberg Commodity Index gained 1.7%, with losses in metals and livestock offset by strength in energy and, not least, agriculture. Grains rallied 5.2% and soft commodities 4%, supported by a combination of a softer dollar, firmer crude oil prices strengthening the biofuel link, lower-than-expected US corn yields, renewed Russia-Ukraine attacks on grain infrastructure and weather concerns underpinning key soft commodities such as coffee and sugar.

Overall, the week belonged to agriculture. Since late June, funds have responded to an increasingly supportive fundamental backdrop by turning into aggressive buyers. Over this period, the combined managed-money position across six grain and soybean contracts and four soft commodities has swung from a 188,000-contract net short to a 756,000-contract net long, almost matching the 3½-year high of 774,000 contracts reached in early May.

In the latest reporting week alone, hedge funds bought a net 276,000 contracts with a nominal value of around USD 9 billion. The biggest contributions came from sugar (+92.4k), corn (+83.7k) and soybeans (+50.3k). Corn buying was particularly broad, with longs rising by 42.7k contracts while shorts were cut by 41k, lifting the net long to 250.5k contracts.

Sugar has undergone an even more dramatic positioning reversal. In just three weeks, funds have moved from a 112k-contract net short to a 151k net long, a swing of more than 260k contracts. The turnaround has been driven by El Niño-related weather concerns, rising price volatility, uncertainty over demand and supply prospects in India, as well as expectations that Brazilian mills may direct a larger share of cane towards sugar production. With the net long now matching its one-year high, however, positioning has quickly moved from a supportive tailwind to a potential source of volatility should the fundamental outlook soften.

Turning to energy, renewed price strength saw the combined crude oil net long rise for a second week, although at a relatively moderate pace to 354k contract which is near the center of the 121k to 554k range seen since March and the Middle East war. WTI buying was limited, while Brent saw both gross longs and shorts reduced, highlighting continued low conviction following the recent whipsaw price action. Elsewhere, all fuel contracts and natural gas attracted moderate buying, with the strongest percentage increase seen in the ULSD net long.

Precious metals, meanwhile, paused to consolidate their recent strong gains ahead of the Treasury buyback-related surge that occurred after the reporting period, when platinum subsequently jumped 9.5%, silver 9% and gold 6.2%. During the week to 18 August, funds added modestly to gold and silver exposure, with the gold net long rising to an 11-month high of 146k contracts, while platinum and palladium both saw net selling.

The timing is important: the COT data therefore captures positioning immediately before the latest acceleration in precious metals and the sharp dollar decline. Next week’s report should provide a clearer indication of how much fresh speculative demand - and potentially short covering -accompanied the post-buyback surge

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, covering positions held as of the previous Tuesday. The reports break down open interest in futures markets into different categories of market participants, depending on the asset class.

Commodities: Producer/Merchant/Processor/User, Swap Dealers, Managed Money, and Other Reportables
Financials: Dealer/Intermediary, Asset Manager/Institutional, Leveraged Funds, and Other Reportables
Forex: A broader breakdown between commercial and non-commercial participants, with the latter generally viewed as speculators

The main reasons we focus primarily on the behaviour of speculators, such as hedge funds and trend-following CTAs, are:

• They are more likely to have tight stops and no underlying physical exposure that needs to be hedged
• This makes them more reactive to changes in fundamental or technical price developments
• Their positioning provides insight into major trends, while extreme positions can also help identify when a reversal or correction may be looming

It is worth noting that this group tends to anticipate, accelerate and amplify price moves that have often already been set in motion by fundamentals. As followers of momentum, these traders typically buy into strength and sell into weakness. As a result, they are often found holding their largest long exposure near the peak of a cycle or their largest short exposure ahead of a trough in the market. For that reason, positioning extremes can be useful contrarian indicators, but rarely in isolation: timing still depends on a fundamental or technical catalyst that changes the prevailing trend.