Speculators have slashed their outlook for agricultural prices just weeks after rating agency Standard & Poor's flagged concerns of a commodity bubble ready to burst.
In what could be a worrying sign for New Zealand's export earnings, investment funds cut bets on rising agriculture prices by the most in three months as supply concerns eased amid signs of a slowing global economy.
Speculators in the week ended June 21 reduced their net-long position in 11 US farm goods by 12 per cent to 674,396 futures and options contracts - the biggest drop since mid-March, according to government data.
Investors bet on declines in wheat for the first time since late November. Coffee holdings tumbled 65 per cent.
New Zealand economists say the outlook for this country's agricultural products, including dairy, looks strong but volatility can bring prices down as fast as they can rise.
The Standard & Poor's GSCI Agriculture Index fell for a third straight week, touching 456.16 on June 23 - the lowest since December.
The agency in a report this month said commodity prices had been at or near record levels earlier this year and had subsided only modestly. It was concerned the situation represented an unsustainable bubble, subject to a sudden correction.
Mike Zuzolo, president of Global Commodity Analytics & Consulting in Indiana, said: "Some of the macro fundamentals are suggesting that funds should take some money off the table here."
Wheat prices have tumbled 16 per cent in June, heading for the biggest monthly drop since October 2008.
Russia, once the world's second-largest shipper, will lift an export ban on July 1, adding to speculation that global supplies will be ample.
BNZ economist Doug Steel said the fall in wheat prices could affect New Zealand exports. "Any lessening in cost pressure for our competitors of dairy and meat would at least in theory increase their supply a little bit, pulling down prices for us on world markets. But that link is certainly not one-for-one and it does depend on how long ... the prices for grain remain a little bit lower than they had been over the last year or so," Steel said.
The supply side felt relatively tight for New Zealand's products, in particular dairy and lamb, Steel said.
"The main game in town I think [is] what's happening in Greece and the outlook for the world economy just looking a little bit soggier than it did. It wouldn't surprise me to see prices come off a little bit in the short term."
Westpac senior economist Anne Boniface said speculative activity could throw prices around in the short term.
"But you tend to think that in the longer run it washes out and it gets back to fundamentals driving prices, so supply and demand."
Westpac expected emerging market demand to weaken, particularly in China, towards the end of the year as previous monetary policy tightening came into effect.
"Our expectation would be for slightly lower prices over the next year on the back of increased supply and modestly softer demand in emerging market economies but for prices to remain at historically elevated levels," Boniface said.
The ANZ Commodity Price Index for dairy products fell in April and May, having in March hit the highest level since May 2008. The meat, skins and wool index fell 0.7 per cent in May but was 38.6 per cent higher than the same month the previous year.
ANZ economist Steve Edwards said there had been a turnaround in dairy prices, although they were still quite high.
"It's [speculator reaction], probably some sort of correlation with the prices that we monitor but they're more financial market traders rather than actual producers or users of the commodities," Edwards said.
It was a volatile market that could go down as fast as it went up, he said.
"There has been a bit of a speculative bubble ... not our soft commodities but more the hard commodities."
- Additional reporting by Bloomberg