Hedge funds got more bullish on sugar before prices climbed to the highest since October as dry weather threatened supply from India to Brazil.

Money managers raised their net-long position for the first time in four weeks. A lack of rain in Brazil is compounding damage from the first-quarter drought and will cut yields, says Job Economia & Planejamento, a researcher in Sao Paulo.

Risks of crop damage are rising as an El Nino weather pattern threatens to reduce monsoon rainfall in India, the largest producer after Brazil. Global output will fall short of demand in the year ending Sept. 30, with the gap widening next season, according to Bruno Lima, a senior risk-management consultant at FCStone do Brasil.

“The drought in Brazil will probably have some impact,” Peter Sorrentino, who helps manage $3.8 billion at Huntington Asset Advisors in Cincinnati, said June 19. “We’ll see pretty decent agricultural price movement through the balance of the year, just because of weather-related issues.”

Raw sugar on ICE Futures U.S. in New York climbed 5 percent last week and touched 18.80 cents a pound today, the highest since Oct. 29. The S&P GSCI Agricultural Index rose 0.9 percent. The wider GSCI gauge of 24 commodities advanced 1.3 percent, and the MSCI All-Country World Index of equities added 1 percent. The Bloomberg Treasury Bond Index slipped less than 0.1 percent.

Sugar Wagers

The net-bullish position in sugar climbed 0.8 percent to 76,477 futures and options contracts in the week to June 17, U.S. Commodity Futures Trading Commission data show. Long holdings rose by the most since May 13.

Yields of cane crushed to make sugar will drop to 71 metric tons per hectare (2.47 acres) this season, from about 79 tons a year earlier, as dry weather hurt crops in Brazil’s Center South, Job Economia & Planejamento estimates.

The lack of moisture will stunt development of plants and growers in the region will harvest less than 560 million tons, according to Michael McDougall, a senior vice president at Newedge Group in New York. That compares with almost 597 million last season, data from industry group Unica show.

If Brazil changes its mandate for how much ethanol is required to be blended with gasoline, it will further reduce sugar supplies and more cane will be used to make biofuel, Kingsman SA said in a report e-mailed June 20. The government will raise the amount of cane-based ethanol that goes into gasoline to 26 percent from 25 percent, newspaper O Estado de Sao Paulo reported June 18.

Global Stockpiles

Ample inventories may keep prices in check. Even with record demand, global stockpiles before the 2015 harvests will reach 45.5 million tons, the highest ever, according to the U.S. Department of Agriculture.

Sugar production in Thailand, the largest exporter after Brazil, will probably rise to a record in the year starting in November as higher returns spur farmers to boost plantings, according to Thai Sugar Millers Corp. Shipments may increase to an all-time high of 9 million tons in 2015 from 8 million tons this year, spokesman Sirivuthi Siamphakdee said May 28.

“There’s a lot of sugar out there,” Darwei Kung, who helps manage $730 million at DWS Enhanced Commodity Strategy Fund in New York, said June 20. “A lot of the weather events are already reflected in the current market price.”

Combined net-bullish positions across 11 agricultural products fell 6.8 percent to 590,839 contracts as of June 17, the CFTC said.

Bets on higher soybean prices slumped 42 percent, the most since August. Investors pared their bullish bets on corn for a sixth week. World stockpiles before the 2015 harvest will climb to the highest in 15 years.

ETF Flows

In the five days through June 19, investors pulled almost $24 million from exchange-traded funds that track agriculture. Outflows across commodity ETFs were $119 million. Combined net-wagers across 18 U.S. traded commodities rose 1.3 percent to 1.19 million contracts as of June 17, the CFTC data show.

Investors boosted their bullish positions on gold by 30 percent to 66,572 contracts, the biggest gain since February. The Federal Reserve said June 18 that interest rates will stay low for a “considerable time.” Futures rallied 3.3 percent last week and were 0.3 percent lower at $1,313 an ounce at 7:24 a.m. in New York.

Wagers on rising oil prices gained 4.3 percent to 356,336 contracts. Crude oil climbed for a second week in New York as the U.S. said it will send military advisers to Iraq to help repel militants in OPEC’s second-biggest producer.

“Different fundamentals rule different commodities,” Michael Cuggino, who manages about $8.5 billion of assets at Permanent Portfolio Family of Funds Inc. in San Francisco, said on June 19. “Energy prices are rising on the fear of potential disruption in global supplies. Easy money will drive gold prices higher, and weather conditions have affected food crops.”

Bloomberg