Hedge funds cut their bullish betting on agricultural commodities to the weakest in eight months – and just in time, as prices headed for a tumble, fuelled by the worst week for cotton futures in more than a decade.

Managed money, a proxy for speculators, in the week to last Tuesday lowered by 28,736 contracts its net long in futures and options in the top 13 US-traded agricultural commodity contracts, analysis of data from the Commodity Futures Trading Commission shows.

That reduced the net long – the extent to which long bets, which profit when values rise, exceed short holdings, which benefit when prices fall – to 832,143 lots, the lowest since October.

And it came just as ag prices were poised for a tumble, fuelled by worries that stubbornly high inflation will provoke more interest rate rises, supporting the funds’ borrowing costs while also too undermining expectations for world economic growth.

‘Specs are exiting the market’

Indeed, the Bcom ag subindex has dipped by more than 5% since last Tuesday, and fallen below 70 points for the first time since February.

Cotton – which has an industrial commodity is viewed as particularly sensitive to economic worries – has for July plunged by 15.0% since last Tuesday, as measured by the best-traded December lot.

On a spot contract basis, New York cotton slumped by 28% last week, its worst performance since July 2011, with fund liquidation viewed as fuelling the tumble.

“We continue to contend that specs are exiting the market as the cost of capital rises and amid severe economic concerns,” said Louis Rose at Rose Commodity Group.

He forecast that “at some point” the US Department of Agriculture, whose crop supply and demand forecasts set global benchmarks, “will likely significantly reduce its estimate of 2021-22 aggregate world consumption” of the fibre.

Managed money reduced its net long in cotton by 2,140 contracts in the week to last Tuesday although, at 61,110 lots, it remained sizeable.

Sugar dips

Raw sugar proved a bigger target of hedge fund liquidation during the week, with managed money cutting its net long in the sweetener by nearly 20,000 contracts to a three-month low of 116,545 lots.

Prices of sugar – which is linked to energy prices through its competition with ethanol for cane in some countries – have also suffered from world economic worries, besides from weakness in Brazil’s currency, which cuts the value in dollar terms of assets in which the South American country is a major player.

The real on Friday reached a four-month low of 5.27 per $1, down more than 10% for June.

Furthermore, sugar prices have been undermined by moves by Brazil to lower gasoline taxes, implying weaker values of ethanol, which competes with gasoline for use by owners of so-called flex-fuel cars.

Grain sales

Among grains, corn and soyoil, are particularly exposed to world energy markets through use in making ethanol and biodiesel respectively, suffered particularly notable selldowns.

Managed money cut its net long in Chicago soyoil futures and options by 12,110 lots to 50,886 contracts, the lowest of 2022.

Hard red winter wheat suffered a fifth successive week of net selling for the first time in more than a year, amid some recovery in the condition of the US crop from drought-caused lows.

At less than 33,000 contracts, the net long in hard red winter wheat is now the lowest in nearly a year.