Bloomberg reports that the futures prices in agricultural commodities are trading high above the cash prices, as speculators come to dominate those markets just as they have in oil:

Garry Niemeyer is paying the price for Wall Street’s speculation in grain markets. Commodity-index funds control a record 4.51 billion bushels of corn, wheat and soybeans through Chicago Board of Trade futures, equal to half the amount held in U.S. silos on March 1. The holdings jumped 29 percent in the past year as investors bought grain contracts seeking better returns than stocks or bonds. The buying sent crop prices and volatility to records and boosted the cost for growers and processors to manage risk.

Niemeyer, who farms 2,200 acres in Auburn, Illinois, won’t use futures to protect the value of the crop he will harvest in October. With corn at $5.9075 a bushel, up from $3.88 last year, he says the contracts are too costly and risky. Investors want corn so much that last month they paid 55 cents a bushel more than grain handlers, the biggest premium since 1999.

“It’s the best of times for somebody speculating on grain prices, but it’s not the best of times for farmers,” said Niemeyer, 59. “The demand for futures exceeds the demand for cash grains.” Commodity investors control more U.S. crops than ever before, competing with governments and consumers for dwindling food supplies…

Index-fund investment in CBOT corn, soybeans and wheat has increased 66 percent to the equivalent of 902,105 futures contracts, a record, since January 2006, when the government began collecting the data. Each contract represents 5,000 bushels, about what Niemeyer reaps from every 22 acres of corn planted.

Investments in grain and livestock futures have more than doubled to about $65 billion from $25 billion in November, according to consultant AgResource Co. in Chicago. The buying of crop futures alone is about half the combined value of the corn, soybeans and wheat grown in the U.S., the world’s largest exporter of all three commodities. The U.S. Department of Agriculture valued the 2007 harvest at a record $92.5 billion. Commodities are in their seventh year of gains

The momentum speculators in commodities are clever chaps. They know that their massive speculation actually causes behavior in the real world — hoarding — that reinforces the profitability of the strategy they are executing. It is regrettable that no regulations apparently exist to exert some control over the speculators who have no legitimate agricultural business interests, but are allowed to manipulate markets with their various momentum schemes.

(What would happen, for example, if futures buyers were forced to accept delivery of the commodities when they didn’t previously close out their positions, or incur some other substantial penalty? It appears that futures really act quite a lot like options in current trading markets. Wasn’t it the decoupling of futures contracts and delivery obligations that sparked tulipmania?)

The speculation-without-consequences might be jolly good fun in tulips, platinum or silver, but it is hard to feel the same way when it comes to food. The speculators’ activities have caused bankruptcies, food riots, panics and killings. Should they be publicly flogged? Or is it all just something that the marketplace will ultimately sort out?

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