Grains boom with hot money

Low US interest rates and the weak dollar are drawing more hot money into grain markets despite the weight of mammoth crops, setting up a potential repeat of last year's boom and bust in that market.

As index funds and other big investors pour cash into futures at the Chicago Board of Trade, U.S. grain prices have been soaring even as farmers harvest the largest soybean crop ever and the second-biggest corn crop.

Prices for corn, soybean and wheat futures on the CBOT, the world's largest grain exchange, are viewed as the global benchmark, affecting prices from Europe to Asia to Africa.

The markets have also been frothy because CBOT rules allow investors much more leverage to use borrowed money than the U.S. stock market, which has much stricter margin rules.

Futures prices still have a long way to go before they approach the highs hit last year, which triggered worries of food shortages before the financial crisis decimated markets. But market watchers remain concerned the latest rally is not justified by fundamentals.

"Corn and bean fundamentals get more bearish every day but the market direction depends on what the funds want to do," said Paul Haugens, vice-president for Newedge USA LLC.

A wave of fund buying through the first half of 2008 drove wheat prices to a record high $13.34-1/2 per bushel, about 135 percent higher than the current level.

CBOT corn last year hit a record $7.65, up about 90 percent above the current price. Soybeans rose to a record high $16.63, about 66 percent more than the present level.

CBOT wheat prices on Wednesday were trading at five-month highs, soybeans at a 2-1/2 month high and corn was at its highest level in nearly a month.

REPEAT PERFORMANCE?

While some fear prices will tumble like they did after last year's rally, when grains markets ran up with crude oil, whose price peaked above $147 a barrel. But other analysts said this rally in grains could extend into next year.

"We can't have a big break in the market because everyone is expecting more fund buying at the beginning of the year," said Joe Bedore, CBOT floor manager for trade house FC Stone.

"We have different fundamentals than we had in the spring and summer of 2008 so I think that will keep prices in check to a certain point. But the investment community did see grains as an asset class then and they still do," said Jerry Gidel, analyst for North America Risk Management Inc.

He said investors, buoyed by low interest rates, will bet on commodities and other asset classes.

"There is a lot of money looking for a home and it's too risky for them to put it all in the stock market, mortgages or some kind of leases like railroad cars for example," he said.

Analyst Charlie Sernatinger of Fortis Clearing Americas echoed the sentiment. "The money supply keeps increasing, it's up 18 percent for this year and some of the money is going into commodities."

"The real problem is that interest rates are too low so speculators are borrowing money and buying stocks and commodities, anything that has value," he said.

Some experts and politicians have warned that a period of hyper-inflation lies ahead, including soaring commodity prices if the money supply continues to grow, pressuring the dollar.

Federal Reserve Chairman Ben Bernanke this week said the Fed is likely to keep interest rates exceptionally low for "an extended period."

CFTC HAS BIG TASK AHEAD

The Commodity Futures Trading Commission (CFTC), which regulates U.S. futures markets, has the task of reigning in speculation in commodities to keep food and energy prices under control.

The CFTC has been enforcing position limit guidelines in an attempt to keep any one fund or speculator from owning an inordinate amount of any commodity.

"Anything the CFTC does is just putting a band aid on the problem," Sernatinger said, adding that low interest rates and a growing money supply have caused higher grain prices.

Gidel said relatively low margin rates have also made CBOT futures an attractive investment.

Margin requirements for grain futures are usually under 10 percent for grain futures, compared to around 50 percent in the stock market, he said, noting that the margin to invest in corn now is only 7.5 percent.

"The CFTC does not have margin control at this point, the margins are controlled by the exchanges," Gidel said.