Feb. 24 (Bloomberg) -- Hedge funds boosted bullish commodity bets to the highest since 2012 as extreme weather threatened global crops and a polar blast increased U.S. demand for heating fuel.

The net-long position across 18 U.S.-traded commodities rose 18 percent to 1.25 million futures and options in the week ended Feb. 18, the highest since September 2012, U.S. Commodity Futures Trading Commission data show. Investors tripled the net- long position in arabica coffee this month to the most bullish since May 2011. Gold wagers climbed to a 16-week high.

Brazil, the biggest sugar and coffee grower, had the driest January in six decades, scorching crops. Arctic-like cold is projected for the eastern two-thirds of the U.S. at the end of the month, boosting demand for natural gas. From extreme cold in the Midwest to drought in California and South America, weather is the “big driver of commodities,” Barclays Plc said in a Feb. 21 report. Commodity funds are headed for the first monthly inflows since September, EPFR Global data show.

“With coffee and things, these rallies are absolutely weather-driven right now,” said Shonda Warner, the managing partner of Chess Ag Full Harvest Partners in Clarksdale, Mississippi, which manages about $150 million of assets. “If we

continue that dry weather, we’re going to have a lot of damaged crops, and we’re going to be in short supply, and that’s going to be positive for the markets.”

David Fuller's view

Weather risks have certainly been a factor in rising prices for soft commodities but they are not the entire story.  Short covering and some speculative purchases have also been a factor.  Similarly, somewhat better crops in 2013 helped to reverse long positions from relatively high levels and encourage short selling.

Recently, short covering and some new long demand lifted prices for gold and silver up out of sideways trading ranges.  Industrial metal prices have also been ranging and a clear downward break, which I do not expect, would be required to offset medium-term scope for somewhat higher levels, as we are already seeing for mining shares.

These are often late-in-the-cycle performers.  When stock markets have had a good run and valuations are generally higher, many investors understandably look for laggards with the potential to be recovery candidates.  The qualification process for miners is relatively straightforward.  Cut overheads and supply, and your balance sheet will improve.  Similarly, earnings will eventually improve as less supply contributes to higher metal prices.