Hedge funds, having been caught out by the jump in coffee futures, risk being wrong-footed by a correction, Macquarie warned, raising the potential for a "violent swing downwards" in prices, which soared to a fresh 16-month high.
Managed money, a proxy for speculators, raised by more than 100,000 contracts its net long in futures and options in the main 13 US-traded agricultural commodities in the week to last Tuesday, according to data from the Commodity Futures Trading Commission (CFTC) regulator.
The rise took the net long – the extent to which long positions, which benefit when prices rise, outnumber short bets, which profit when values fall - above 600,000 contracts for the first time in 16 months.
Hedge funds have now more than reversed in three weeks the bearish swing taken between October and January, the longest unbroken trend of increasingly short positioning on record.
And the switch has been driven in part by a reversal in sentiment towards New York-traded arabica coffee, in which speculators have, in the face of dry weather in top producer Brazil, turned this month from a net short position to their biggest net long position in nearly three years.
Arabica coffee futures for May soared 5.8% on Monday to 179.25 cents a pound at one point, a 16-month high, and taking their rise in 2014 to 59%, reflecting what many observers have termed an "unprecedented" drought in Brazil's main central coffee belt.
Speculators' net longs in New York softs, Feb 18 (change on week)
Cocoa: 80,126, (+182)
Cotton: 58,449, (+6,237)
Arabica coffee: 24,291, (+9,563)
Raw sugar: -26,489, (+12,087)
Sources: Agrimoney.com, CFTC
"While it is too early to predict potential losses with certainty, Brazil's arabica yields and quality will be constrained during this season and the next."
The comments came as the bank raised to 60 cents a pound its forecast for arabica coffee futures this year, foreseeing values averaging 150 cents a pound over the summer and autumn, easing to 145 cents a pound in the last three months of the year.
However, Macquarie cautioned that the rise in futures prices has been "almost entirely fund driven", with commercial buying "fairly steady" and, indeed, talk that roasters are covered "through to the end" of 2014.
"New fresh [fund] longs have been added for fear of a market shortage, causing prices to break through various technical barriers," Macquarie analyst Kona Haque said
"This in turn has attracted the macro funds into New York coffee too – further enhancing the rally."
Index funds, noting a fall in coffee prices below production costs at the end of last year have "added more allocation to coffee futures and bought coffee ETFs [exchange traded funds]".
However, Ms Haque also highlighted that "funds are pricing in the worst-case scenario", with the potential for a "violent swing downwards" in prices if Brazil's coffee output proves less disappointing than has been feared.
Speculators' net longs in grains and oilseeds, Feb 18, (change on week)
Chicago soybeans: 195,492, (+29,593)
Chicago soymeal: 74,953, (+4,376)
Chicago corn: 45,252, (+10,912)
Kansas wheat: 18,549, (+5,515)
Chicago soyoil: -33,596, (+14,837)
Chicago wheat: -34,402 (+8,823)
Sources: Agrimoney.com, CFTC
The bank forecast a 53m-bag Brazilian harvest, lower than the 56m-58m-bag crop that the country had been on track for before drought, but above estimates of 50m-52m bags from some other analysts.
Herszkowicz Nathan, executive director of the Brazilian Coffee Industry Association (ABIC ), has said that buyers are for now waiting for more of the trend in coffee futures to become evident before reviewing their own costs and prices.
Signally, as an example of pressure from producer pricing, arabica futures in Brazil's BMF market have more than doubled their discount to New York futures this year.
The CFTC data also showed Brazil's drought prompting hedge funds to trim their net short position on raw sugar futures and options. Brazil is the top sugar producer and exporting country too.
Speculators' net longs in Chicago livestock, Feb 18, (change on week)
Live cattle: 129,349, (-3,517)
Lean hogs: 59,762, (+11,234)Feeder cattle: 11,579 (+1,579)Sources: Agrimoney.com, CFTC
Hedge funds also took their net long in Chicago corn to a seven-month high of 45,252 contracts, while reducing their net short in Chicago wheat futures and options to a three-month low of 34,402 contracts.
However, within the livestock sector, speculators trimmed their net long from the previous week's three years high, ahead of US data on Friday widely seen as bearish in seeing feedlots take in far more cattle for fattening than had been thought.