Acting as though the commodity bull market that started two years ago is something new, Congress fired a warning shot at commodity markets this week by proposing additional regulations on commodity markets in an attempt to slow down speculation buying and further price appreciation.

On Wednesday, Sens. Joe Lieberman, I-Conn., and Susan Collins, R-Maine, released three separate draft proposals, all of which were designed to limit both the types of investors that could purchase speculative commodity positions and the number of speculative positions that could be accumulated. The proposals are only drafts and will most likely result in months of debate and revisions, but the effect on the futures markets was swift and severe on Thursday.

Energy prices fell sharply in early trading, despite bullish reports on both Wednesday and Thursday regarding oil and natural gas inventories. By midday Thursday, crude oil had fallen more than $4 on the day, a loss of 3 percent, and natural gas had lost 55 cents, or more than 4 percent.

Grains were also hard hit despite the continued flooding, late plantings, lower than average crop conditions and lowered yield forecasts from the Department of Agriculture. Corn, wheat and soybeans were all down by 1 percent to 2 percent by midday Thursday.

Whether or not speculators are to blame for the surging cost of food and energy has been a topic of debate for months. Even if speculators are not to blame and the price hikes are solely based on supply and demand of the underlying commodities, these proposals would still have a cooling effect on prices because they would limit or even eliminate major buyers of commodity futures contracts.

Before Thursday, grains were continuing their rally from the previous week.

Nearly every piece of data from farmers and the Department of Agriculture points to big stresses in the grain markets. After a wet spring and late plantings for both corn and soybeans, flooding has ravaged the heart of corn country in Iowa and Northern Illinois. Even now, water levels on the Mississippi and some tributaries continue to rise, threatening dozens of cities and hundreds of thousands of already-planted acres of prime farmland.

To date, hundreds of thousands of acres have already been flooded, resulting in either a complete loss for the year or a need to replant when water levels recede. At issue is whether or not lost corn acres can be replanted with more corn.

Most analysts will tell you that planting corn now is playing with fire because many things could damage the crop and lower yields (hot summer, early frost, etc.). As such, it is most likely that any flooded acres that are replanted will be planted with soybeans or other fast-growing crop.

The possibility of losing corn acres to soybeans in the face of already tight supplies is the fundamental force driving corn prices higher all the way out to 2010. This week, the December 2008 futures contract for corn reached record high of more than $7.91 per bushel. The December contract is significant because it represents the price that farmers can expect to receive for this year's crop rather than last year's crop that they may have in storage.

Earlier this spring, before farmers had fully decided what to plant, the December contract was trading at less than $6. Since that time, corn has risen more than 30 percent. Only time will tell how much corn farmers will manage to harvest this fall and traders are anxiously awaiting any data to try to make predictions.

Walt Breitinger is vice president of commodities at Wachovia Securities. He can be reached at (219) 738-6460.