I would like to present you a very interesting setup in soft commodities I am observing for a while now. I wrote about COT positioning already, so a frequent reader should be familiar with the term and how to read it. This time there is an extreme imbalance in hedge fund and producer positioning in sugar, cocoa, coffee and orange juice while the price of each sits at very low levels.
On the first chart let me show you how hedge funds and producers are positioned. The numbers presented are showing a combined (total) values adjusted by open interest. I will not show you positionings of individual commodities, because individual charts would introduce unnecessary noise and also because combined numbers show a much stronger story. Price on the chart represents an equally weighted average of normalized prices.We can see that, as mentioned above, COT positioning is at historical extreme both for funds and producers. This is implying that we might see a huge imbalance in supply demand dynamics going forward. Can you imagine a case if hedge funds have to start covering their shorts? And also start building longs…
Now we have to decide what and under which conditions we’d want to get long. Do we want to buy each commodity a bit with equal weights or do we want to buy just one? On the next chart let me show you a monthly chart showing the ratio between NY Cocoa and Sugar #11 going back 30 years.We see that cocoa is cheap compared to sugar and that the path of least resistance should be up where cocoa could even double against sugar. If we check other chart comparisons we’d come to very similar conclusions. While there is not a big difference between individual positionings this historical pattern is suggesting we should be favoring cocoa over others.
Now we know we prefer cocoa, so let us take a look at the cocoa chart. We see that there was already happening a very nice accumulation phase in the last couple of months while hedge fund didn’t decrease their short exposure but rather even increased it. I think that funds will get worried should the price close above 2000 and finally start liquidating their positions should the price close above 2100.
Let’s see how this plays out, but I have a feeling this could be a wonderful opportunity to play if from the long side.