High ag prices attract investment into sector: CME

CHICAGO Thu Mar 17, 2011 2:44pm EDT

CHICAGO (Reuters) - High prices for agricultural commodities will attract investment into the sector that could boost production and help increase global food supplies, according to David Lehman, managing director for research at exchange operator CME Group Inc (CME.O).

"We have entered an era where demand has been growing faster than supply," Lehman said on Wednesday at the Reuters Food and Agriculture Summit. "These high prices are really what the market needs to encourage investment, encourage additional resources to be allocated to production and to reach an equilibrium."

Prices for major agricultural commodities such as corn, soybeans and wheat remained relatively flat for 20 years, during which time technological innovation in the sector stagnated.

"We went through two decades of very stable supplies and prices in the 1980s and 1990s and I think it honestly did not encourage the kind of investment in research and technology that is needed to meet the growing demand," Lehman said.

But the recent rally that sent prices for agricultural futures to their highest levels since 2008 was a game changer that could cause new fields in areas such as South America to be prepared and developed as crop land. Additionally, capital investments will improve the transportation of grain and processing facilities.

PRICE MOVES AMPLIFIED

The big price spikes have come as new investors such as hedge funds have entered the market.

"What you see is an amplifying of the price volatility when there are unexpected changes either in demand or supply," Lehman said. "The overriding characteristic of the markets that I am seeing in the last few years is just kind of this inelasticity of demand is having a greater impact on prices."

That amplification also has been noted on the downside, with prices for corn, soybeans and wheat falling sharply during the last week even as global supplies remain tight.

Lehman added that there was no evidence that speculators were causing the wild price swings or the increased volatility in the commodities market.

Futures were still an effective tool for farmers and grain elevators to manage their risks as they market corn, soybeans and wheat.

"It benefits hedgers when they need to manage risk, when they need to reduce risk. They are able to do that in an efficient way because of the liquidity that speculators provide."

(Editing by Steve Orlofsky)

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