Jan. 2 (Bloomberg) -- Corn futures in Chicago may rise above a 10-year high and soybeans may extend a rally as demand increases for alternative fuels made from crops.

Twenty of 26 traders, farm advisers and grain merchants surveyed Dec. 29 by Bloomberg said to buy both commodities. Corn advanced 1.6 percent last week, the third straight gain, and jumped a record 81 percent in 2006. Soybeans climbed 3.4 percent, ending the year up almost 14 percent.

Rising demand for alternative fuels is eroding supplies of crops normally used for animal feed or food processing. U.S. production capacity for corn-based ethanol, already at a record, may double in the next two years, and the government said last month demand for biodiesel made from soybean oil may rise 17 percent in 2007. The U.S. is the largest producer and exporter of both crops.

``The fundamental story of the increasing number of ethanol plants will carry corn prices higher,'' said Jerry Gidel, a market analyst for North American Risk Management Services Inc. in Chicago.

Corn futures for March delivery climbed 6.25 cents last week to $3.9025 a bushel on the Chicago Board of Trade, the ninth gain in the past 10 weeks. Prices reached a 10-year high of $3.935 in November after a Midwest drought reduced U.S. production and demand for grain to make ethanol rose to a record. Corn's 57 percent advance from September through December was the biggest for any four-month period since at least 1973.

Soybean Prices

The March soybean contract rose 23 cents to $6.9725 a bushel last week, the third consecutive weekly gain. Prices reached a 17-month high on Dec. 29 and have jumped 28 percent in the past three months, the most over a three-month period since October 2003.

Grain futures trading in Chicago is closed today for the funeral of former President Gerald R. Ford. Electronic trading will resume this evening at 6:30 p.m. in Chicago.

Most respondents surveyed Dec. 22 correctly predicted corn and soybeans would rise last week. The corn survey has been accurate 55 percent of the time since it began April 26, 2004. The soybean survey, which started six weeks later, has been correct 54 percent of the time.

Ethanol Demand

U.S. demand for corn used to make ethanol, a gasoline additive, will rise 34 percent to a record 2.15 billion bushels in the marketing year that began Sept. 1, the U.S. Department of Agriculture said Dec. 11. Corn is the nation's biggest crop and is also used to make livestock feed and sweeteners.

The 110 factories now producing ethanol in the U.S. have boosted their annual capacity by 12 percent in the past six months, to 5.3 billion gallons, according to the Renewable Fuels Association in Washington. An additional 6 billion gallons of capacity will be added in the next two years as 79 new plants or expansions are completed, the association said.

``New corn demand being added for 2007-2008 may push final corn demand from ethanol to 3.8 billion bushels,'' Gidel said.

High diesel-fuel prices also are spurring global demand for alternative energy made from vegetable oils such as soybeans, forcing processors such as Archer Daniels Midland Co. and Bunge Ltd. to deplete record global inventories to the lowest in more than 30 years.

There are 88 plants in the U.S. that produced an estimated 250 million gallons of biodiesel in 2006, triple last year's production of 75 million gallons, according to the National Biodiesel Board in Jefferson City, Missouri.

Global use of vegetable oils in fuel will rise 17 percent in 2007 to 21.6 million tons from 2006 and more than double the 8.7 million tons used six years ago, the USDA predicts. That's almost equal to the entire food consumption of vegetable oil in China, the biggest consumer.

Declining Inventories

Global inventories of vegetable oils may fall to the lowest since 1974 as tax incentives encourage more production of biodiesel made from rapeseed in the European Union and soybeans in the U.S., said John Baize, president of John C. Baize and Associates in Falls Church, Virginia.

``Global vegetable-oil prices could go through the roof in the next 12 months,'' Baize said. ``If all the planned biodiesel plants were to come on line in the next two years, it would consume 45 percent of the exports from the top five vegetable oil exporters and leave little left over for food.''

Increased Investment

Corn and soybeans also may get a boost from increased investment demand in commodities, many of which have outperformed stocks and bonds.

Investments in commodity indexes including the Goldman Sachs Commodity Index and the Reuters/Jefferies CRB Index will rise to $110 billion in January from $70 billion a year earlier, New York-based Goldman Sachs Group Inc. said Nov. 6. The California Public Employees' Retirement System, the largest U.S. public pension fund, plans to invest $500 million in commodities for the first time this year.

Trading volume on the Chicago Board of Trade in 2006 rose 20 percent to 805.9 million contracts from a year earlier, the fifth straight record, the second-biggest U.S. futures exchange said today in a release. Average daily volume in agricultural futures and options including corn and soybeans rose 40 percent to 510,666 contracts from 364,572 contracts on average in 2005.

Corn volume rose 72 percent to 58.56 million contracts in 2006 while soybean volume rose 7 percent.

`A Lot More Money'

``A lot more money will be coming into commodities,'' said Alan Kluis, president of Northland Commodities LLC in Minneapolis. Long positions in agricultural commodities are ``a hedge against inflation and a way to hedge against a declining U.S. dollar,'' he said.

Pension funds and other institutional investors are betting that agricultural commodities, including wheat, which surged 48 percent last year, will provide better returns than equities. The gain for the Standard & Poor's 500 Index in 2006 was 13 percent.

``Those investing in hard assets are going to place money in instruments that are more sector specific,'' including agricultural commodities, said Dale Durchholz, a market analyst for AgriVisor Services Inc. in Bloomington, Illinois.

To contact the reporter on this story: Jeff Wilson in Chicago at jwilson29@bloomberg.net

Last Updated: January 2, 2007 10:59 EST