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Farmland prices are setting records and farmer incomes have been buoyed by exports and biofuels, easing the pain of some rough summer weather from drought, floods and fires.

Amid China's voracious appetite for grains and worries about climate hurting crops and food supplies in many countries, U.S. agriculture's attraction as the world's breadbasket has become a beacon for Wall Street.

Firms like Omaha-based Gavilon, owned by Ospraie, a hedge fund associated with George Soros and Canada-listed Ceres Global Ag have been buying up grain elevators from Wyoming to Toronto.

That is unusual: investors owning grain silos. But analysts say it's not what it seems. No one wants to hold corn as a long-term asset, like gold bullion. But storing and moving grain for others has now become a very profitable business.

William Wilson, a consultant and professor at North Dakota State University, said that 10 years ago you could store grain at elevators 2-1/2 to 3 cents per bushel per month. Now costs can be 8-10 cents a month depending on location or grain.

"We've seen a lot of big new entrants into the agricultural commodity industry including White Box, Gavilon and others who are expanding," Wilson said, referring to Minnesota-based hedge fund White Box Advisers, once an owner of grain storage.

"One reason has been the shift to ethanol having a bigger part of the market, where they demand quick access to corn on a 12-month basis," Wilson said.

"Most of the time when you hear of private capital moving into agriculture they are talking about buying farms. But storage is a logistical function of the marketplace," he added.

Wilson said special market factors, such as changes to the Chicago Board of Trade wheat contract, have also had the cumulative effect of raising prices for grain storage.

"It's very important that in the last five years the market price of storage has increased," Wilson said. "That has provided incentives to construct storage and has provided incentive for new players to enter into this world."

Don Grambsch, president of Riverland Ag Corp, a Minnesota firm owned by Ceres, operates 14 grain facilities in Minnesota, North Dakota, Wyoming, New York and Ontario with capacity to store 50 million bushels of grain. He said they don't have investors storing grain as long-term holdings.

"I have not heard of them wanting to buy physicals," he said. "We are a conventional grain company and store for third party users ... They are not financial people, they are processors, beverage companies and so on."

FARMLAND PRICES SOAR

Wall Street investors and hedge funds also continue to push money into speculative vehicles like grain-related indexes and funds that trade grain derivatives. Corn gains in the last five years look almost as impressive as gold's.

But the traditional asset play on agriculture by Wall Street -- farmland -- has also pushed to dizzying heights.

The Chicago Federal Reserve Bank on Wednesday said farmland prices in the Midwest in the second quarter were up 17 percent from a year ago -- the biggest jump in 34 years.

Most of the 226 bankers questioned in its quarterly survey said they expect prices to level off in the next three months -- but a third also said they expected even more gains.

"Demand for farmland remained strong from both farmers and investors," the Chicago Fed said.

It is the same story in the Plains. The Kansas City Fed on Monday released its own banker survey showing similar results with farmland values up more than 20 percent from a year ago.

University of Illinois economist Gary Schnitkey attributes the soaring value of farmland to the sluggish economy and the inability of the United States, the European Union and other sovereign debtors to come to grips with fiscal imbalances.

"The threat of long-run instability places a premium on real assets over financial assets. This suggests that a more stable general economic outlook would lead to less aggressive growth in farmland prices," Schnitkey said.

(Reporting by Christine Stebbins; Editing by Peter Bohan)

A lack of progress on some of the economy's biggest issues -- from sovereign debt in Europe to growing signs the U.S. economy is in danger of slipping back into recession -- will drive more uncertainty and moves from one extreme to another.

However, with the S&P 500 down 17.6 percent from its 2011 high, many investors say a bottom could be near and bargain hunters could trigger at least a momentary bout of buying.

"We're not even close to the end of volatility, but given a decline of almost 17 percent in 13 days, we could see a rise from these levels," said Mike Gibbs, chief market strategist at Morgan Keegan in Memphis, Tennessee.

"If there's something major with the European situation, that could be a catalyst for value investors to come back in."

The situation in Europe has been dictating much of the market's recent movement. On Tuesday, shares fell after a meeting between the heads of France and Germany failed to squelch fears about euro-zone leaders' ability to contain the region's debt issues, which could impact global growth and the profit outlooks of U.S. banks.

Market participants will also be looking ahead to comments from Federal Reserve Chairman Ben Bernanke at the central bank's annual meeting in Jackson Hole, Wyoming, on Friday.

The Fed recently pledged to keep interest rates "exceptionally low ... at least through mid-2013," news that sparked a short-lived rally, suggesting that there may be little new information coming out of the Jackson Hole meeting that could move markets.

"There's nothing Bernanke can do that's likely that will help stocks," said Matt McCormick, a money manager at Cincinnati-based Bahl & Gaynor Inc, which has $3.2 billion in assets under management.

"If you see potential bank problems out of Europe before then, he might have some ammo for another round of quantitative easing, but absent that, investors hoping for an August surprise will likely be disappointed."

AN ATTRACTIVE YIELD

The S&P 500 fell 4.7 percent this week, extending losses of 12.4 percent over the previous three weeks, its worst streak of that length in 2-1/2 years.

The CBOE Volatility Index, also known as the VIX, is up 20 percent this week.

In a note, Birinyi Associates wrote that while the market remained difficult in the short term, there were indications that stocks were attractively valued.

Noting that the S&P 500 was 10 percent below its 50-day moving average, Birinyi said, "This is the most oversold the market has been" since March 2009.

Birinyi pointed out that the 2.25 percent dividend yield on the S&P 500 was higher than the 10-year U.S. Treasury note's yield, making this "only the second period since the 1950s where stocks have yielded more than bonds."

DOING THE EUROPEAN "LOCK-STEP"

Issues in Europe may take on outsized influence next week as the U.S. earnings season draws to a close, with Tiffany & Co and Applied Materials among the few S&P 500 companies on tap to report.

Earnings, while often overshadowed by macroeconomic themes, have largely come in stronger than expected, giving investors at least one reason for optimism.

Next week, investors will have plenty of U.S. economic indicators to watch, including the release of data on new home sales data, durable goods orders, consumer sentiment and gross domestic product. Should the data follow the recent trend of weak reports, which have contributed to the growing sense that growth will be muted, it could cause further selling.

"There's still something of a sense that this is just a weak patch in the economy, but prolonged weak data would point more definitely to a double dip," said Marc Scudillo, managing officer at EisnerAmper in New York. "There's a good floor to the S&P 500 at 1,100 right now. If we go under that, there's room to move even further to the downside."

While U.S. growth concerns remain a primary focus for investors, the issues in Europe are seen as the primary driver of the U.S. stock market in the near-term.

On Tuesday, markets fell as the leaders of France and Germany failed to discuss boosting the size of the euro zone's rescue fund or the sale of euro bonds, though they detailed closer euro-zone integration. Many investors believe more aggressive policies are needed to restore stability to the area.

"What I'm seeing right now is a basically a crisis of confidence, more so than an economic crisis or financial crisis necessarily at this stage," said Natalie Trunow, chief investment officer of equities at Calvert Investment Management in Bethesda, Maryland.

Trunow, who helps oversee about $14.8 billion in assets, cited "the inability by policy-makers to come to a good path" as the reason for the uncertainty.

Morgan Keegan's Gibbs said that the endgame in Europe was that "if confidence doesn't return, we'll continue to see the S&P essentially moving in lock-step with European markets."

(Reporting by Ryan Vlastelica; Editing by Jan Paschal)

Gross, the co-chief investment officer at Pacific Investment Management Co., which oversees $1.2 trillion, also told Reuters Insider television the U.S. is running out of monetary and fiscal policy options.

"It is increasingly apparent to us that policy options are limited and that economic growth is slowing down," said Gross said.

Thursday, Morgan Stanley warned in a research report the United States and euro zone are "dangerously close to recession," joining a number of firms that have slashed forecasts for global growth in the second half of the year. Not only are economists and investors bracing for a slowdown in the U.S., they are concerned about a deceleration in China's growth rate to persistent sovereign-debt turmoil in Europe.

Morgan Stanley cut its global GDP forecast to 3.9 percent growth from 4.2 percent for 2011, and to 3.8 percent from 4.5 percent for 2012.

"There's no doubt that (U.S.) growth from the standpoint of employment or unemployment and growth from the standpoint of corporate profits is definitely a risk -- whether or not we see a positive 1 percent real GDP number I think is besides the point."

Gross said low Treasury yields are flashing recessionary conditions.

"They certainly reflect, in terms of their yields, not only a potential for a recession but the almost high probability of recession and the result of lowering of inflation -- that is key."

On Thursday, the yield on the benchmark 10-year U.S. Treasury note dropped below 2 percent to 1.98 percent. Friday, the 10-year yield stood around 2.08 percent.

In May, Gross told Reuters the only way he would purchase Treasuries again is if the United States heads into another recession.

Gross, who manages the $245 billion Total Return Fund, reiterated that sentiment on Friday: "I don't think there is any value there unless you see a recession."

For more from the Interview, please click on insider.thomsonreuters.com/

(Reporting by Daniel Burns, Burton Frierson and Jennifer Ablan; Editing by Neil Stempleman)

Belgian Finance Minister Didier Reynders said the bloc should issue common euro bonds and expand its bailout fund to calm repeated market selloffs of government bonds and bank shares of vulnerable debtor countries.

Germany has led resistance to both proposals. Belgium's support for bonds promoted by high-debt nations such as Italy and backed by some European Commission officials will not necessarily tip the balance.

But Reynders' call in the Financial Times for the euro zone had to prove it had "deep pockets" underlined increasing fears among euro zone governments that they would be unable to reassure investors that euro zone banks are safe without drastic action by the 17-nation bloc.

Merkel repeated her criticism of proposals for euro zone bonds, telling a rally of her Christian Democrats this was a "slippery slope" that would probably leave everyone worse off.

"Euro bonds would not allow any rights at all to intervene to force discipline on others," she said.

French Prime Minister backed her view, writing in an editorial published in daily Le Figaro that common euro zone bonds without further fiscal consolidation could threaten France's triple-A credit rating.

Bickering over the latest Greek bailout and lingering disappointment over Wednesday's Franco-German summit helped drag European shares to near two-year lows on Friday.

Fears that major world economies are heading for recession are adding to worries that euro zone banks face short-term funding troubles, losses from sovereign debt and weak trading income.

Greece, at the center of the euro zone debt storm, also announced its economy would shrink by more than previously thought -- by 4.5 percent this year against an earlier estimate of 3.8 to 3.9 percent.

"The best way to resolve a debt crisis is to grow out of it so a recession certainly would not help. I think the confidence element is very important now," said ING economist Martin van Vliet. "It's time to break the downward spiral of a self-fulfilling recession. We are in that stage right now."

Spain's announcement of further austerity measures and a move to support its stricken housing market, aimed at showing it was working hard to stay out of the debt crisis, had little market impact.

BAILOUT SQUABBLE

Market impatience with the pace and complications of euro decision-making has been heightened by a rush by smaller euro economies to demand collateral from Greece in return for contributing to its bailout fund, and Austria sought on Friday to resolve that dispute.

The collateral demand, first made by Finland, has ruptured the common line found at the July 21 summit, particularly after Austria, the Netherlands and Slovakia said on Thursday they deserved the same treatment.

Dutch finance minister Jan Kees de Jager described as "very complicated" Austria's proposal that more collateral should be available to countries whose banks and insurers were less exposed to Greece.

Marco Valli, chief eurozone economist at UniCredit, said that Europe needed more than ever to be speaking with one voice.

"If you want to sell your pact to save Greece then you should not be fighting about this. It undermines the credibility of the package," he said.

For markets though, the issue of collateral may be more of a sideshow compared with the debate on additional support for the zone.

Germany, the euro zone's chief paymaster, has repeatedly opposed a big increase in the bailout fund and says that common euro zone bonds would remove incentives for fiscal prudence, rewarding profligate nations.

European Central Bank heavyweight Juergen Stark described jointly issued bonds on Friday as a "false solution."

Even so, BNP Paribas Chief Eurozone Market Economist Ken Wattret said he believed euro zone leaders would ultimately agree to launch common bonds and to increase the bailout fund.

"It would be helpful for markets if the EFSF were increased now, but the political reality is that this is unlikely to happen until at least later in the year," he said.

(Additional reporting by Sara Webb in Amsterdam, Stephen Mangan in London, Petra Wischgoll in Hameln, Germany, Marc Angrand, Nicholas Vinocur in Paris)