The blow given to harvest prospects by weather setbacks, from the US to Australia, may spark a buying spree in agricultural commodities by speculators, Rabobank said, lifting price forecasts for crops including soybeans and wheat.
Managed money, a proxy for speculators, has thanks to "heightened macro uncertainty", slashed to 405,579 contracts its net long position in agricultural commodity futures and options - down more than 40% on the average for last year, and more than 60% lower than at the 2011 peak.
"Clearly, as the focus on eurozone troubled has intensified, managed money has been taking risk off the table," Rabobank said.
However, that may be about to reverse as setbacks to crops such as US corn and Russian wheat, threatened by dryness, and sugar cane in Brazil, where excessive rain is hampering harvesting, create "compelling bullish scenarios in the agri complex".
'Fresh round of speculative investment'
"The agri complex provides an opportunity for some risk-on trading despite the macro storm, as fundamentals turn bullish on weather concerns," Rabobank said.
Notably, "escalating weather concerns for US row crops have provided a trigger which may see a fresh round of speculative investment in agricultural markets, particularly the grains and oilseeds complex".
The bank, saying it was "constructive agri prices in the near-term", raised its price outlook for futures in a number of farm commodities, including Chicago soybeans and soymeal, and Kuala Lumpur palm oil.
Estimates for wheat, which had been reconfirmed on Monday were revised up for later contracts, taking a return below $6 a bushel in Chicago off the cards for at least a year.
'Potentially explosive situation'
The improved outlook for wheat prices reflected in part a downgrade to 24.5m tonnes in the forecast for Australia's dryness-tested wheat crop this year, although this estimate is still above the official figure, and enough to support exports of 21m tonnes.
Other revisions included a 68m-bushel cut to 3.24m bushels in the estimate for the US soybean harvest this year, thanks to the poor start to the crop which has created a "potentially explosive situation" for new crop futures "if weather conditions continue to deteriorate".
The crop, as of Sunday, showed its worst mid-June condition rating since 1993, the bank said, lowering its forecast for the soybean yield to 43.5 bushels per acre from 43.9 bushels per acre.
There was a risk "that the US soybean stocks-to-use ratio falls below 4% in 2012-13 without significant demand rationing and further upside price potential from current levels".
The bank said it was "bullish" over corn futures too, despite trimming its estimates for prices in the forthcoming July-to-September quarter, by $0.10 to an average of $6.10 a bushel during the period, a downgrade reflecting the poor performance US exports in the face of cheaper Brazilian supplies.
Brazilian corn prices, at some 14 real a bag, were only just above the cost of production, meaning "Brazilian selling may become more reticent as bullish expectations build around lower US production".
Indeed, there was a "very real chance" of a US corn yield this year below 153 bushels an acre, compared with the record 166 bushels an acre forecast by the US Department of Agriculture.
A historically low level of speculators' net long positions in corn offered "a considerable catalyst for high prices", in creating potential for a large return of cash.
'Bullish' on cocoa
Rabobank made fewer changes to forecasts for soft commodities prices, but highlighted nonetheless the "bullish" prospects for cocoa prices, which appeared undervalued given "coming production risks" and reduced pressure from a sale programme by Ivory Coast, the top producer.
"Our outlook suggests prices need to increase to encourage more production to meet growing demand," the bank said.
Meanwhile, the sale by the Ivory Coast of 620,000-640,000 tonnes, out of a 2012-13 crop cocoa estimated at 1.4m tonnes, implied only 200,000 tonnes more for sale by October, given an advance marketing target of 70-80%.