Money managers are now holding the biggest bullish wager in three years on farm goods from cotton to soybeans. They got bullish in January, defying forecasts for abundant supplies of everything from grains to coffee to sugar. As more bets were added over the quarter, the Standard & Poor’s Agricultural Spot Index jumped 16 percent, five times the gain across commodities.

The rally is snapping the longest contraction in prices in 14 years, a slump caused by rising supplies. Now, Brazil’s worst drought in decades is threatening coffee, sugar and citrus crops as U.S. farmers contend with dry and freezing weather. The two represent about a sixth of global trade in farm goods. Futures markets are responding, exchanging cattle and hogs at record prices and adding 63 percent to the cost of coffee.

“Last year, people believed that things were back to normal, and that we were going to have huge inventories,” said Kelly Wiesbrock, a portfolio manager at Harvest Capital Strategies in San Francisco, which oversees about $1.8 billion. “Those assumptions usually catch people off guard. If there’s another supply disruption, then we could potentially be in a tight spot. It’s all dependent on weather.”

March Rally

The S&P Agriculture Index of eight commodities climbed 6.7 percent since the start of March. The S&P GSCI Spot Index of 24 raw materials including energy and metals gained 0.2 percent, for an annual advance of 2.9 percent. The MSCI All-Country World index of equities slipped 0.4 percent this month, the Bloomberg Dollar Index was little changed and the Bloomberg Treasury Bond Index dropped 0.3 percent.

Combined net-bullish positions across 11 agricultural products climbed more than fivefold in the first quarter, U.S. Commodity Futures Trading Commission data show. As of March 25, investors held 1.06 million contracts, the most since February 2011. Wheat holdings are the most bullish in 16 months, and coffee bets are the highest in six years.

Wheat traded in Chicago is poised for the biggest quarterly gain since September 2012. Cold, dry weather has reduced the outlook for winter crops in the U.S., the top exporter, just as a rail backlog delays supplies from Canada. Fields in Germany had 49 percent less rainfall than average in the past 180 days, according to World Ag Weather.

Ukraine Tension

Escalating tension in Eastern Europe has threatened to disrupt grains shipments. Russia is set to be the fifth-largest wheat exporter this year, ahead of Ukraine, according to U.S. Department of Agriculture data. American corn sales booked for delivery before Sept. 1 are more than double the year-earlier pace, USDA data show.

Brazilian farmers, already enduring the worst drought in decades, may next face a deluge of rain on the world’s biggest coffee, sugar and citrus crops, according to Somar Meteorologia.

Higher prices may prompt farmers to increase plantings. U.S. growers will probably sow the most acres of soybeans ever, according to a survey of 34 analysts by Bloomberg News. The USDA will update its crop acreage outlook today at noon in Washington.

Rising Inventories

U.S. corn and soybeans inventories will increase under “normal planting and growing weather conditions,” Goldman Sachs Group analyst Damien Courvalin said in a March 10 report. World stockpiles of corn will jump 18 percent before this year’s Northern Hemisphere harvest to 158.5 million metric tons, the highest since 2001, according to the USDA.

“The prices look on the high side,” said Donald Selkin, who helps manage about $3 billion as chief market strategist at National Securities Corp. in New York. “Both corn and wheat prices are approaching levels that are not sustainable. I think we’ll have a normal growing season.”

Combined net-wagers across 18 U.S.-traded commodities more than doubled this quarter to 1.66 million contracts as of March 25, the biggest gain since September 2010, the CFTC data show.

Investors added $649 million into U.S. exchange-traded funds tracking commodities this year through March 27, data compiled by Bloomberg show. Inflows into precious metals total $976.2 million, while almost $20 million was pulled from energy funds.

Gold Wagers

Hedge funds cut their net-bullish position in gold by 13 percent in the week ended March 25 to 120,042 contracts, the CFTC said. Prices in New York dropped 3.1 percent last week as accelerating U.S. economic growth cut demand for haven assets. American consumer spending, which accounts for almost 70 percent of the economy, rose in February by the most in three months, the Commerce Department said March 28.

Bullish bets on crude oil dropped 2.9 percent last week to 293,403 contracts. West Texas Intermediate climbed 2.2 percent last week in New York, the most since Feb. 7. Inventories in Cushing, Oklahoma, the futures delivery point, declined to 28.5 million barrels, the lowest since January 2012, the Energy Department’s statistical arm said March 26.

Speculators increased net-short wagers in copper to 25,034 as of March 25, and have been betting on price declines for four straight weeks. Stockpiles monitored by the Shanghai Futures Exchange climbed 54 percent this year.

Coffee Surges

Hedge funds boosted their net-bullish holding on arabica coffee by 9 percent to 43,416 contracts, the highest since March 2008. Prices surged 63 percent this quarter, the biggest rally since the three months ended March 1997. This year’s drought in Brazil, the world’s biggest grower and exporter, may tilt the global market into a supply deficit, ending four years of surpluses, according to Keith Flury, an agricultural strategist at BNP Paribas SA.

“When you have big shocks to inventory, the amount of time that it takes to replenish them can be lengthy,” said Nelson Louie, global head of commodities at Credit Suisse Asset Management, which manages $11.7 billion. “While the expectation is there will be a supply response, the question is, over what time frame?”

To contact the reporter on this story: Luzi Ann Javier in New York at ljavier@bloomberg.net

To contact the editors responsible for this story: Millie Munshi at mmunshi@bloomberg.netPatrick McKiernan

http://www.bloomberg.com/news/2014-03-30/grain-bulls-proved-right-with-best-rally-since-2010-commodities.html

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