Concerns over the impact of Brazil's drought on crop production has spurred hedge funds to a month of bullish positioning exceeded only once in history, raising ideas of price volatility to come.
Managed money, a proxy for speculators, raised its net long position in futures and options in the top 13 US-traded agricultural commodities by nearly 134,000 contracts in the week to last Tuesday, according to the Commodity Futures Trading Commission, the US regulator.
The increase took the net long – the extent to which long positions, which benefit when prices rise, outnumber short contracts, which profit when values fall – to 737,000 contracts, the most positive positioning since September 2012, amid the rally caused by a dearth of rain in the US.
"Trading funds are about as long now as in the 2012 drought," said Mike Mawdsley at broker Market 1, adding that the extent of fund interest "makes for volatile moves".
"Funds, money flow, could make for choppy price action going forward."
The latest weekly move also took the increase in hedge funds' net long position during February to more than 490,000 contracts, a switch in sentiment beaten only once since records began in 2006.
Speculators' net longs in New York softs, Feb 25 (change on week)
Cocoa: 79,313, (-813)
Cotton: 53,202, (-5,247)
Arabica coffee: 27,866, (+3,575)
Raw sugar: 21,818, (+48,307)
Sources: Agrimoney.com, CFTC
This time, it is dryness in Brazil - the top producer and exporter of coffee and sugar, and a big force in the likes of corn and soybeans too - which has spurred hedge funds to bet on rising prices.
Indeed, the rally caught many speculators out, with managed money net short in arabica coffee and raw sugar futures and options in late January, before prices soared.
In arabica coffee, managed money is now net long by 27,866 contracts, the most since May 2012, thanks to the worries over Brazil's harvest, which exporter Terra Forte believes will come in at 46m-48m bags, well below figures of 60m bags or so being talked about before drought started in December.
Speculators' net longs in grains and oilseeds, Feb 25, (change on week)
Chicago soybeans: 202,996, (+7,504)
Chicago corn: 87,516, (+42,264)
Chicago soymeal: 73,588, (-1,365)
Kansas wheat: 23,425, (+4,876)
Chicago soyoil: -17,767, (+15,829)
Chicago wheat: -20,311 (+14,091)
Sources: Agrimoney.com, CFTC
The cane harvest in Brazil's key Centre South district, within the drought zone, will in 2014-15 hit at best 570m tonnes, according to Job Economia, down from 596m tonnes this season.
Hedge funds have also increased their bullish positioning in soybeans - for which heavy rains in western areas have threatened yields, besides dryness in the east and south – with the net long topping 200,000 contracts for the first time in 17 months.
In grains too, hedge funds took a more bullish position, raising their net long in corn to the highest since June, and cutting their net short in Chicago wheat by more than 14,000 contracts, amid concerns over the impact of the cold winter on the condition of US seedlings.
Speculators' net longs in Chicago livestock, Feb 25, (change on week)
Live cattle: 128,234, (-1,115)
Lean hogs: 65,506, (+5,744)Feeder cattle: 11,568 (-11)Sources: Agrimoney.com, CFTC
In livestock, lean hogs continued to attract more bullish bets, amid growing concerns over porcine epidemic diahorrea virus (PEDv), which have sent Chicago future prices close to a record high, on a spot contract basis.
The week ending February 16 saw 310 new cases of PEDv, which causes high mortality in piglets, meaning total recorded infections have doubled since mid-December.
In live cattle, hedge funds trimmed their net long after data showed US feedlots taking on far more animals in January than had been thought.
However, with supplies deemed tight nonetheless, and beef prices moving higher, futures have continued to rise, setting a record high on Friday.