Rice Price Dice

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" It became apparent we were going to become incredibly tight," he said. "Then at the beginning of the year we started noticing millions of dollars of hedge fund money sloshing around" all agricultural commodities. David Lehman, director of commodity research and product development at the CME Group, said that hedge funds, or other speculative money, have certainly added to the fever around these commodities lately.

But he added that the so-called hot money is not what is driving the market, as some have claimed in the oil and gold markets. The latest report from the Commodity Futures Traders Commission about outstanding rice contracts shows that only about 19% of them are held by non-commercial investors, or companies that might be speculating as opposed to actually hedging against price moves.

He said effects such as production problems, demand increases, the increase in energy costs for producers, and even the decline in the value of the U.S. dollar have all played even bigger roles in contributing to the surge in prices. The dollar itself has contributed to about 25% of the price increases in agricultural commodities, especially in corn and wheat, he said.

" We had a bit of a perfect storm in a lot of these markets," over the past year, he said. "Commodities are very energy intensive to produce and transport."

Like with tech stocks, housing, and oil and gold before them, there is an element of a bubble to the surge in agricultural commodities prices. But unlike with the others -- even oil -- the result of higher prices has become a global problem almost immediately. It's one thing to lose your retirement money on Cisco Systems or Yahoo, or even to lose your house on a bad subprime loan. But these rising costs are threatening the survival of millions of people.

Banning trading isn't the answer. Open markets set more efficient prices. Indeed, the origins of the CBOT involved Midwestern farmers who needed to trade futures to hedge against crop failures. In the old days, traders could even look out the windows of the old exchange and, local lore has it, rains in Chicago could affect prices across the board.

Today, however, computers link news and prices across the globe, and so a cyclone in Asia can conceivably push prices in Chicago. The system is more complex, and more fragile. The food crisis is likely the first of many we'll see over the years as vital commodities suddenly appear scarce: oil, food, energy, even water. It's a warning sign not just for markets and investors, but for the entire prospect of a global economy."

All eyes still remain on oil (including those of central bankers) but Bloomberg reports that "gold's failure to keep up with gains in crude oil may signal lower prices, said Dennis Gartman, an economist in Suffolk, Virginia, and the editor of the Gartman Letter. It now takes about seven barrels of oil to buy an ounce of gold when the ``normal'' ratio is 15 to 1, Gartman said in a report to clients today. ``If gold cannot rally as crude oil spirals higher, what shall happen to it when crude oil does eventually top out and head lower,'' Gartman said. ``The trend for gold remains down.''

Although the present gold-oil relationship does raise valid doubts, surely, the gold market will also take cues from price patterns in other commodities as well as currencies in the near-term. It could also be possible that the next sell signal in oil will have some of the proceeds find their way into gold for the next leg of another play. Final gold sales figures from India might have an impact as well, perhaps even by tomorrow, but for the moment, the metal remains within the range.

Happy Trading.