(Bloomberg News) Commodities are poised to enter a bull market led by surging grain futures amid the worst U.S. drought in half a century and on mounting optimism growth in the U.S. and stimulus from China will boost demand.

The Standard & Poor's GSCI Spot Index of 24 raw materials rose as much as 0.7 percent to 673.82 today in London, the highest since May 3. The gauge has jumped 20 percent from this year's lowest close of 559 on June 21. A close at this level will signal commodities entering a bull market.

The worst U.S. drought in a half century sent soybeans to an all-time high of $17.0475 a bushel today, while corn reached a record $8.49 a bushel on Aug. 10 on the Chicago Board of Trade. The Department of Agriculture has slashed its corn harvest forecast by 27 percent since June, after declaring more than half of U.S. counties as disaster areas while drought conditions stretched from California to New York.

"The grains have been the strongest performing subsector in commodities the past few months, and that has purely been driven by supply-side considerations and the U.S. drought in particular," said Sudakshina Unnikrishnan, a London-based analyst at Barclays Plc. "While the rest of the commodity sector has been grappling with euro zone debt and macro headwinds, the grains have been isolated from that."

Oilseeds and grains are the best-performing commodities this year among 80 tracked by Bloomberg. Soybeans jumped 41 percent in 2012, the biggest increase on the GSCI, as the drought parched crops in the U.S., the top producer last season. The GSCI's 4.4 percent gain lags behind a 9 percent advance in the MSCI All-Country World Index of equities. Treasuries returned 1.3 percent, a Bank of America Corp. index shows.

Goldman Projection

The jump in grains and oilseeds sent world food prices up 6.2 percent in July, the biggest increase since November 2009, the United Nations Food & Agriculture Organization said Aug. 9. The gauge, which tracks 55 food items, slid about 7 percent in the previous three months on the outlook for bumper world harvests and ample dairy and meat supplies.

In mid-June Goldman Sachs Group Inc. moved to a "near-term overweight" recommendation in commodities. On Aug. 10 the bank maintained forecasts for a rally in corn to $9 a bushel in three months, adding that soybeans may climb to $20 a bushel while wheat may reach $9.80 a bushel. Corn rose 0.4 percent to $8.27 a bushel today in Chicago, while soybeans traded at $16.985 a bushel and wheat was at $9.07 a bushel.

"We expect soybean prices to outperform to ration resilient export demand in the face of critically low U.S. supplies, corn prices to rally to secure sufficient ethanol demand destruction and wheat prices to underperform corn prices on relatively higher supplies," Goldman analyst Damien Courvalin wrote in the Aug. 10 report.

Corn Production

U.S. corn production may drop to 10.78 billion bushels, a six-year low, while the soybean harvest at 2.69 billion bushels would be the smallest since 2007, the USDA said Aug. 10. Crops are in the worst condition since 1988, a year when the corn harvest tumbled by 31 percent because of drought.

In the week ended Aug. 14, hedge funds held wagers on a rally across 18 U.S. futures and options contracts near the highest in 11 months, according to the most-recent U.S. Commodity Futures Trading Commission data. A measure of 11 U.S. farm goods showed speculators' bullish bets in agricultural commodities rose 0.6 percent.

The two crude oil components in the GSCI index, West Texas Intermediate and Brent, have rallied 24 percent and 28 percent, respectively since June 21, as a European Union embargo on purchases of Iranian oil took effect July 1 and as European economic leaders committed themselves to preventing any break-up of the euro area.