WASHINGTON (AP) - Costlier corn flakes, pricier pizzas and painful pump
fill-ups share more than top billing among consumers' worries.
They're all riding a roller coaster of commodity market prices, where peaks
are unusually high. Like oil futures, agricultural futures have experienced
dramatic highs and lows in recent months as Wall Street investors flock to
commodities for protection from the falling dollar and slumping stocks.
But the ups and downs in futures prices are giving grain sellers and farmers
financial vertigo. Instead of finding predictable prices for wheat, corn and
other crops in futures markets, they're getting daily price jolts and no refuge
from uncertainty.
That has prompted government regulators to examine what forces, if any, have
thrown the markets off balance.
The Commodity Futures Trading Commission said last week it will meet with
farmers, traders and grain sellers next month to assess the recent price jumps.
The loss of equilibrium has rattled large grain merchants that buy wheat and
other crops and sell them to food processors like Kellogg Co. and General Mills
Inc.
"There has been a huge influx of capital from index funds and pension funds
to the point now where futures markets are not reflecting actual supply and
demand," said Todd Kemp, spokesman for the National Grain and Feed Association.
As a result, Kemp said grain buyers have had to pay more to hedge themselves
against future price shifts. Some of those expenses have been passed on to food
processors and then to consumers. The futures volatility is adding to a cocktail
of cost-raising factors that have pushed bread, cereal and other staples to
record highs.
The price of white bread rose to $1.32 a pound last month, up 28 percent
from a year ago, according to government data.
Wheat prices have been pushed higher by smaller harvests this year, as many
farmers devoted more acreage to corn in expectation of higher ethanol demand.
President Bush signed energy legislation in December mandating a six-fold
increase in ethanol use by 2022.
At the same time, poor wheat harvests in Australia and parts of Europe
caused China and other Asian countries to buy up more American crops.
The combination of real-world demand and turbulent markets has placed
farmers in an unusual situation.
"These are very favorable prices for farmers, but they can't benefit from
them if they can't sell their futures," said Melvin Brees, an agriculture
analyst at the University of Missouri. Turbulence in the market has put
financial strain on grain buyers, causing them to scale back spending on
futures.
In the latest shift, agriculture futures plummeted last week as a rebounding
dollar persuaded many investors to sell their holdings in commodities. Wheat
futures closed below $10 a bushel on the Chicago Board of Trade for the first
time in more than six weeks.
"These historic market conditions, particularly in wheat and cotton, require
the CFTC to hear firsthand from participants to ensure that the exchanges are
functioning properly," said agency chairman Walt Lukken.
Traditionally, as a futures contract is about to expire, its value converged
with the approximate cash price of the commodity. But in recent months there
have been increasing gaps between futures and cash prices.
Regulators will try to identify the disconnect at an April 22 meeting in
Washington, but many buyers and experts suggest the source of fluctuation is
clear: increasing speculation by Wall Street investors.
"Speculators have probably put some error in the futures market," said
Darrell Good, professor of agriculture economics at the University of Illinois.
Grain producers and buyers are expected to ask regulators to reject a
proposal to raise price limits on commodities, effectively creating a higher
band on which futures could trade. The commission last raised price limits in
2005, and commodities users say another increase would aggravate current price
swings.
But experts say more far-reaching changes may be necessary -- regardless of
how much speculation takes place.
"We do have a lot more speculative money in these markets, but even so the
system should be designed so the delivery process works," Good said.
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