Damn right they can and they probably will. They did it with commodities like wheat in early 2008 even as the consumption-to-stock ratio actually warranted a decrease in prices. This is now happening again as cotton hits a 15 year high, exploding corn prices drive the price of beef up to 25 year highs and the rest of the agricultural commodity complex takes off into the stratosphere.
When you link a financial derivatives market, which is technically infinite, to a market of actual hard goods (finite in supply), a price bubble becomes highly possible, even probable. When you drop rates to nothing, leave them there and then add the sex appeal of a long-term uptrend for global food consumption, you are tying a goat to a post in the T Rex cage, virtually beckoning the beast to come and gorge himself.
Marshall Auerback quotes an email exchange with commodities trader and portfolio manager Mike Masters over at Naked Capitalism:
Speculation in commodities can be exemplified from the following illustration. Money can be “created” by fiat. Because there is already much more capital available in the world than hard commodities, and also because money can effectively be created in a nearly infinite way; speculators, without limits, and with determination, can increase the price of consumable commodities, like food stuffs or energy, much higher than traditional consumers and producers (hedgers) can react. When derivative markets are linked to real commodity markets, this nearly unlimited capital from the financial sector can cause financially driven excessive price volatility. This is because in the derivative markets, a nearly infinite amount of new commodity derivative contracts can be created to satisfy the demand of financial sector speculators armed with fresh capital. However, because there is only a FINITE amount of bona fide actual hedgers (producers and consumers of the actual commodity), any speculative demand that exceeds the real amount of commodities that can be hedged at that time must be sourced from other speculators. However, these speculators will only supply new contracts via price- i.e. a new speculative demand that exceeds hedger supply must be sourced from new speculative supply at ever higher prices.
To sum up, we’re talking about an untethering of supply and demand, a divorce between prices and reasonable expectations of actual consumption. Sounds very much like what went on when housing became an investment plaything for banks, funds and brokerage firms.
While endlessly low rates have failed to produce anything even resembling jobs growth or housing recovery, our new unintended consequence seems to be a higher tab for our daily bread (and coffee and vegetables and dairy and beef, etc).