Commodity prices continue to soar as USDA further reduced corn, soybean and cotton production estimates while, at the same time, the Federal Reserve announced it plans to buy $600 billion of U.S. government bonds over the next eight months.

This action by the fed has the potential to put an additional $600 billion into circulation by expanding the monetary base (a narrowly defined measure of the money supply consisting of deposits held at the Federal Reserve by depository financial institutions plus coin and currency) from a current $2 trillion to near $3 trillion. Long-term, the monetary policy of the fed is designed to encourage more borrowing and stimulate economic growth; near-term the policy keeps interest rates low and the dollar weak, providing underlying support to dollar denominated commodities.

Additional commodity price support is coming from speculators attracted to commodity investments due to up trending commodity prices and low investment returns from low risk alternative investments like bonds. Prices for nearby corn and soybean contracts reached life-of-contract highs recently at about $5.90/bu.and $13.20/bu., respectively. Cotton futures contracts were trading at record highs with December 2010 trading over $1.50/lb.