Christmas and New Year’s had wheat prices popping the cork in Chicago and Kansas City. From about Thanksgiving on, markets have exploded to levels not seen since the 2008 rally, surging past $8.50 for July 2011 Chicago futures and $8.80 for K.C. July.

As was the case in 2008, higher oil prices were among the reasons grains and other commodities also rallied. Fund traders apparently like commodities as good investments now and are behind much of the bullish market, analysts say. And it’s not just in the U.S.

The Economic Times in India notes that higher commodity futures have encouraged equity investors to book profits in shares of food processing companies. They fear that rising food-grain prices could hit profit margins of these companies.

"Higher demand for agri-commodities during festive season (a major holiday) and lower output due to heavy rains have resulted in prices firming up," says Alex Mathews, head-research, Geojit BNP Paribas Financial Services. "Traders expect commodity prices to scale up. This is forcing them to create long positions in the futures market."

There will undoubtedly be more pressure on grain prices with the coinciding increase in food prices, whether caused by higher wheat, corn or meat prices for producers or not. A United Nations (UN) report last week indicated that world food prices have hit record levels and are now in "danger territory.” The Guardian newspaper reported that the UN warned unpredictable weather could cause further food price rises this year.

A UN price index surpassed its previous high in June 2008 last month to reach its highest since records began in 1990. The 2008 prices caused food riots in several countries.

With virtually all commodity prices riding on rallies, the battle for acres among wheat, corn, soybeans, cotton and other crops will play a big role in price determination. USDA releases its 2011 Winter Wheat Seedings Reporttomorrow (Jan. 12). There are trade estimates that total wheat acres will approach 60 million this year, up 10%. U.S. Wheat Associates says growers should also closely monitor the January World Agricultural Supply and Demand Estimates, also due out tomorrow.

Markets have pulled back some, something not uncommon in the volatile environment seen lately. Tom Fritz, market analyst for EFG Group LLC, notes that last week’s export sales “came in at the high end of expectations but not enough for anyone to take notice. 

 “The forecasts for the U.S. winter wheat areas are quite cold but maybe with some snow cover before the frigid temps set in,” he says. “Ukraine says their winter wheat is in excellent shape. We may have seen some front running of the expected rebalancing in Chicago, but that doesn’t explain the fall in K.C., as the rebalancing there is to feature some buying.”

Fritz says “trading funds are having a ball pushing this market around,” adding that “the best that can sum up the recent action here is turmoil/turbulence at the market’s recent upper end.” He wonders how long the market can keep going higher “with smoke and mirrors” likely created by speculative trading.