Hedge funds are net bullish on wheat for the first time in four years, with long positions reaching a six-year high.

Hedge funds turned net long wheat for the first time in nearly four years, betting on fertilizer and fuel shortages driven by U.S. drought conditions and the Middle East war—shortages that will push prices higher.

According to weekly data released by the U.S. Commodity Futures Trading Commission (CFTC) on Friday, for the week ended March 31, Chicago wheat futures long positions exceeded short positions by 8,641 contracts, reversing the net short positions that had persisted since June 2022.

The shift was mainly driven by a surge in long positions. According to CFTC data, long positions rose to 117,375 contracts, the highest level in more than six years; short positions fell to 108,734 contracts.

The war between the United States and Israel against Iran has entered its sixth week. Middle East energy infrastructure has been severely damaged, and the transport of fuel and fertilizer through the Strait of Hormuz has also been disrupted.

Farmers around the world are scrambling to secure supplies of critical inputs and, in some cases, switching to crops that are less dependent on fertilizers. The disruption from the war has raised concerns about food security and reversed market sentiment for agricultural products that had been under pressure due to ample supply. In March, wheat prices briefly touched the highest level in a year, then gave back some of the gains.

Long-lasting drought in the U.S. Plains threatens output in this key growing region and provides support for wheat prices. However, according to predictions from the U.S. National Weather Service Forecast Center, some areas are expected to see precipitation this week. The latest forecast, along with some investors taking profits, drove wheat prices lower on Monday.

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Byline: Li Zhaofu