Friday, April 4, 2008

Who's bumping up food prices?

Who's bumping up food prices?
Investors desperate for better returns choosing commodities, but they are only partly to blame
April 04, 2008

Reuters News Agency

NEW YORK–High food prices around the world? Blame, at least in part, the investors who moved their money into commodities in the past five years, looking for better returns than they were getting from stocks and bonds.

Global investment funds saw the potential for profits in commodities outstripping those from the stock market, and from 2002 started diving into oil, followed by metals and then grains.

This move was fuelled by falling interest rates in major economies, which makes fixed-income investments less attractive, and a weak U.S. dollar, which tends to drive up the price of dollar-denominated investments such as most grains.

This in turn attracted speculators, investors with little or no connection to the grain market, who took corn, soybean and wheat prices to a whole new altitude.

Corn futures hit a record $6 (U.S.) a bushel yesterday and soybeans reached a record $15.8625 a bushel on March 3 on the Chicago Board of Trade, the benchmark for world prices. CBOT wheat peaked at $13.495 a bushel in February.

Stung by high transportation costs from record oil prices, food makers have passed some of the high crop prices to consumers, leading to protests. Some nations have even withheld grain exports to guarantee domestic supply.

Investors say high prices are supported by fundamental supply-and-demand factors like a higher-protein diet in emerging economies like China, demand for biofuels made from corn, soybeans and palm oil, and drought in some important grain exporting nations. But investors bear at least some of the blame, economists say.

"The idea is there are a lot of new players in the commodities futures game and those new players don't necessarily have a vested interest in the market beyond the speculative interest," said Chad Hart, an agricultural economist with the Center for Agricultural and Rural Development at Iowa State University.

Hart said although agricultural commodities trade on fundamentals like harvest reports, they've become more volatile due to the influx of new money.

"Unfortunately, I think when people are trading commodities, I don't think they are even caring about social impact," said Gary Kaltbaum, who runs a hedge fund in Orlando that is invested in grains. "What these people do is invest, their job is to make money. If they think something's going to go higher, they're going to trade on it. They're not going to be worried about repercussions somewhere else."

Investors say the farm sector is partly to blame for failing to invest enough in production over the past five years. With the U.S. credit squeeze getting worse by the day, securing loans has become harder for farmers in the world's biggest grain exporter.

Also, grain elevators – companies that buy from farmers and remarket to processors – are seeing losses because they have committed to provide grains to processors at much lower prices than today's.

Unfavourable weather has played havoc with crops. A severe drought in major wheat exporter Australia lit a fire under the wheat market.

Adding to the mix is the race to make biofuels. The U.S. has a mandate to produce 9 billion gallons of ethanol, made from corn, this year.

Given the varied factors at play, blaming hedge funds and other speculators for current commodity prices may not be fair.

"These things can cut both ways," said Kaltbaum, "and there'll be a time when they go down also."

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