Large speculators, which include hedge funds, have cut their net long position from 7.8 mio bales to 3.6 mio bales during the same time frame. Small speculators, also called 'non-reportable' positions, saw their position shrink from a 2.3 mio bales to a 1.2 mio bales net long, and even Index Funds had a small reduction from 11.1 mio bales to 10.6 mio bales net long.
It may seem odd that Index Funds reported a reduction in their position over the last couple of months, but that may be explained by the fact that even though there is still net cash flowing into these various funds, the total amount of money invested may buy fewer contracts if there is a big price jump when positions get rolled forward.
In other words, we should expect a significant drop in the Index Fund long position when they roll their current long from July into December at the prevailing 13% premium. They will still have the same dollar amount invested, but it will be spread over a smaller number of contracts.
Judging by the low trading volume and these shrinking positions, it has become evident that all groups involved are currently taking a much more cautious approach to the cotton market. The trade has clearly been bruised by the spike in March and has since taken a more disciplined approach to its risk management, particularly in regards to cash management.
We expect the trade to reduce its current net short position further over the summer months as hedges are being lifted, because the US is now clearly the residual supplier and current inventory is being sold at a rate of about a million bales a month, while not much new crop cotton is coming into play until later this summer.