March 25 (Bloomberg) -- Morgan Stanley, the second-biggest U.S. securities firm, raised its price forecasts for corn and soybeans by 20 percent on higher demand for food and ethanol.

Corn may average $6 a bushel and soybeans $18 a bushel in the 2008-2009 marketing year, New York-based research analysts led by Hussein Allidina wrote in a report e-mailed today. Allidina forecast an average of $5 for corn and $15 for soybeans last month.

Corn and soybeans surged in the past year, with both touching records this month, as investors boosted commodity holdings. Rising crude oil prices have spurred governments worldwide to mandate increased use of renewable fuels, including ethanol.

``U.S. production of corn and soybeans in the near term is inadequate to meet growing ethanol and export demand,'' Allidina wrote. ``Prices will need to move considerably higher.''

Corn prices have risen 35 percent in the past year, reaching a record $5.795 a bushel on March 11 on speculation growers will plant more soybeans and wheat. The May-delivery contract on the Chicago Board of Trade gained 3.4 percent to $5.2475 yesterday.

``Aggressive and politically driven fuel-ethanol targets, and the need to increase acreage outside the U.S. to satisfy growing developing-world demand, will likely lend continued long-term support'' to agricultural prices, Allidina wrote.

Soybean prices have jumped 71 percent in the past year, reaching a record $15.8625 on March 3, after U.S. farmers planted the fewest acres in more than a decade. Soybeans for May delivery gained by the exchange limit of 50 cents to $12.57 a bushel yesterday, after declining 11 percent last week.

``The sharp price declines observed across the commodity space last week resulted from a combination of factors, including a strengthening U.S. dollar and reduced inflationary expectations, rather than a change in the underlying supply and demand fundamentals,'' Allidina wrote.

To contact the reporter for this story: Glenys Sim in Singapore at gsim4@bloomberg.net

Last Updated: March 24, 2008 21:11 EDT