June 30, 2008

USDA chief: Speculation driving up grain prices but regulation not needed

Speculative investing is causing the rise in grain prices but the laws of supply and demand should apply, USDA Secretary Ed Schafer said Friday (June 27, 2009).

Rising commodity prices have given concerns to higher inflation, especially with crude oil and corn prices setting record highs Friday. Though the inflationary impact is most noticeable in oil prices, Schafer said the effect could also be seen in food prices.

Schafer said while commodities traders in Chicago and Kansas City have told him that some of the increased investment funds are offset by increased hedging activity on the part of active farmers and grain users, speculative business influences inflation.

Speculators have been drawn to grain markets recently because of strong crop prices and investors seek exposure to alternative investments.

However, he does not see regulation as an effective antidote.  Rather than impose laws to curb speculation, the laws of supply and demand should be followed, he said. If speculation is stopped only when prices are rising, the government would also be obliged to stop it when it is falling, he said.

Just Thursday, the US House of Representatives voted to order the Commodity Futures Trading Commission to use its emergency powers to immediately curb excessive energy market speculation.

His comments come as the market for commodities and oil continue to rally.