Large speculative funds liquidate their entire cocoa position

The most recent Commodity Futures Trading Commission (CFTC) report showed that large speculators sold close to 18,000 long futures contracts, reducing their total net length (futures only) to a nominal 126 total contracts. Including futures and options, the large spec category is now net short overall, the first time they’ve been net short in 2022.

This category of investors normally approaches the market from the long side, looking for a bullish story and price appreciation in commodities. That is particularly true these days of inflation as most commodities appear a natural hedge against rising prices. We have witnessed this already in commodities like corn, soybeans, wheat, gold, oil, and natural gas, not to mention industrial metals.

In recent years, speculators typically carried a long position, about 95 percent of the time, so it is highly unusual for them to be net short overall in the current environment. This is the shortest position held by funds since the fall of 2021, when they shorted the market briefly for about a month in November and December.

On the heels of this speculative selling, cocoa futures traded down below $2,400 per MT in the first half of June. From a technical perspective, cocoa futures did look oversold—per RSI, Bollinger bands, and stochastics—signaling that the market was becoming vulnerable to a short-covering rally. Coupled with recent ICCO estimates of a deficit of 174,000 MT, both fundamentals and technicals seemed to align towards the downside.

Spot Jul-22 cocoa made it down to about $2,300 per MT, and second futures position fell to $2,350 per MT. We have now entered the Silly Season, the summer period (June to August) corresponding to the little dry season across Western Africa. This is typically a time of intermittent rains during the second half of the midcrop, in the period leading to the next or new season’s main crop.

Cumulative arrivals are still lagging last year, and it is unlikely that the difference will be made up over the next three months. Initial estimates for the new crop will be published over the coming months, but trees are reported to be in good condition with decent pod load.