Commidity Prices Driving up Food Costs

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U.S. hedge funds, speculators and commercial and private investors have poured billions of dollars into commodity futures markets in recent years. This has made a huge impact on global markets, says economist Chad Hart of Iowa State University's Center for Agricultural and Rural Development.

"We do have a lot of investors seeking out not only agricultural commodities, but just all physical commodities in general as a safe haven for their funds to protect them against inflation and against the weak dollar," says Hart. "But just given the sheer volume of funds that we're talking about being pushed into some of these commodities, especially the agricultural commodities, just in terms of dollars, that creates a fairly sizeable impact on the markets they are entering."

While conceding that speculation has contributed to inflating commodity futures prices, analyst Chuck Pierson of Investor Commodity Services in Minnesota cautions that other factors are also at work.

"Most of the speculators are momentum investors. So as the prices go higher, they are inclined to enter the market and try to profit out of the increase in prices. But these prices have been driven up for a lot of other reasons than pure speculation. It [i.e., speculation] is contributing to the increased prices. But you have hedge funds in our market now from equity investors trying to hedge their portfolios against inflation," says Pierson. "And the regulatory people are looking into that -- for instance, the size of what they [i.e., investors] can enter into the markets with. Some of the hedge funds don't have limits on the number of contracts they can buy because they are classified as hedgers."

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