CHICAGO, Ill. (Reuters) – Crop prices surged last week as the U.S. Federal Reserve’s plan to buy $600 billion in government bonds drew investors to commodities and pushed the U.S. dollar down.
The move is aimed at keeping interest rates low and encouraging borrowing to stimulate economic growth.
“With the government putting more money in the system to lower interest rates, which lowers the value of the dollar, it’s the green light to buy commodities,” said grains analyst Don Roose of U.S. Commodities in West Des Moines, Iowa.
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But the situation raised alarm of an inflationary bubble like in 2008 when oil and raw materials struck all-time highs before the crash.
Already gold, sugar and cotton are at all time highs, rubber is at a 30 year high and crop futures are the highest in about two years.
U.S. Federal Reserve chair Ben Bernanke has argued the likelihood of deflation is greater than of inflation.
But inside and outside the U.S. central bank, critics have said this second round of quantitative easing could lead to high inflation and low interest rates that would create asset bubbles as investors sought returns by piling into riskier asset classes.
Some analysts believe the stimulus package alone is not enough to spark runaway inflation. That would require stronger fundamentals in supply and demand.
Metal inventories are shrinking, but the oil market, in contrast to 2008, is amply supplied and that could put the brakes on rising prices.
Fuel inventories in the United States, the world’s biggest oil consumer, reached record levels in September and overall stocks are still higher than a year ago.
The Organization of the Petroleum Exporting Countries in its World Oil Outlook on Nov. 4 took a conservative view on price – assuming only $75 to $85 a barrel to 2020 – and said spare OPEC capacity was high at around six million barrels per day.
