Crop prices soaring, but for how long?

Corn rose above $5 a bushel in trading on the Chicago Board of Trade on Monday as agricultural commodity markets surged for a second day after a government report Friday that said global reserves of corn were lower than expected.

Monday's 3.4 percent spike in corn futures prices means corn prices have risen 49 percent in the past five months, even after a record harvest last year of 13.1 billion bushels, a near 24 percent gain over the previous year.

To some, prices are getting to look a lot like a bubble.

"Once it tips over, this thing could be incredibly violent going down," said Al Kluis, president of Northland Commodities Inc., a Minneapolis brokerage firm.

"The history of commodity bull markets is that prices will drop twice as fast as they went up."

The spiraling price of corn futures has been mirrored in the wheat and soybean futures markets, where prices are hovering at $9 a bushel and just below $13 a bushel, respectively. Biofuels, ethanol and global demand from overseas economies are behind the boom, but so, too, are the rise of Wall Street funds that invest in commodities.

This new class of exchange-traded funds has poured billions of dollars into commodity indexes, said analyst Kent Beadle of Country Hedging, a division of CHS, a diversified agricultural company.

The returns for those funds last year were in the 30 to 40 percent range, he said. If the returns fail to live up to those high expectations, investors will start to leave, and that, in turn, could lead to a rapid drop in prices.

"The correction could be fairly severe," he said. "The $60 million question is 'When is that going to happen?' And that's something no one knows the answer to."

A government report on Friday lowered the U.S. corn production estimate for 2007 from 13.168 billion bushels to 13.074, boosting corn prices Friday.

That continued somewhat on Monday as corn for March delivery rose another 17 cents to close at $5.12 a bushel. The record price for a corn futures contract was set in 1996 at $5.55 a bushel.

The high price of corn has already forced some companies to delay or cancel plans for new ethanol plants, Kluis said.

"A lot of the privately funded plants are not going to be moving forward," he said.

Some 63 new plants and seven plant expansions are still planned, for a total 5.7 billion gallons a year of production capacity, according to the Renewable Fuels Association. The nation's 137 ethanol plants produce 13.3 billion gallons of ethanol.

The world's reserves of wheat are just above 15 percent of annual use, thanks to two years of bad crops in many wheat-growing areas and surging demand from India and China.

"It's as tight as it's been in 35 years," Beadle said.

(Distributed by Scripps Howard News Service, www.scrippsnews.com.)