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We’ve been harping on commodity inflation since November – not surprisingly, so now is everyone else.  We’ll rejoin the chatter with an update on ten key commodities, their YTD price performances, their correlations with the US dollar index (over the last six weeks), and some commentary on what is driving the prices (other than correlation with the USD).  For reference, the US dollar index is down 1.06% YTD.

WTI Crude Oil: -5.00% YTD, +0.38 correlation w USD

  • Supply of oil at Cushing, OK (the storage hub where WTI is priced) hit an all-time high on February 2nd of 38.3MM barrels.  This glut of oil may not recede anytime soon, as the Keystone XL pipeline from Canada is expected to bring an additional 150,000 b/d into Cushing starting this month.  The result of the over-supply?  WTI has lagged other light, sweet grades that have jumped on the strife in the Middle East; the WTI-Brent differential is ~$14.

Natural Gas: -9.01% YTD, +0.14 correlation w USD

  • The blast of snow and cold across much of the US during January and early February could not resuscitate natural gas prices, which have dropped back down to $4.00/Mcf.  Associated gas production that comes with oil drilling in shale plays is keeping gas production elevated.  Furthermore, warmer-than-normal weather forecasts for the next two weeks in the eastern and central U.S. have investors worried that record inventory draws will not continue.

Coal: -10.17% YTD, +0.60 correlation w USD

  • China, the US, and India are the top three consumers of coal.  Coal consumption has a +0.94 correlation with China’s GDP and a +0.96 correlation with India’s GDP (Dhakal et al, 2007).  Growth in China and India is slowing (email us for recent reports).  Couple that with the flood waters receding in Australia (the world’s largest coal exporter), it’s not a surprise that coal prices are down 10% YTD

Gold: -4.10% YTD, +0.56 correlation w USD

  • Gold underperforms when real interest rates are positive and rising; as a result, gold had its worst January in twenty years.

Copper: +1.50% YTD, -0.49 correlation w USD

  • Dr. Copper hit an all-time high of $4.63/pound early this morning despite the fact that demand for the metal appears weak.  Inventories of copper at the London Metal Exchange are up 5% this year as orders to draw copper from stocks dropped 4% over the same time period.

Corn: +11.45% YTD, -0.87 correlation w USD

  • In yesterday’s crop report, the USDA announced that stockpiles of corn before the next harvest will be 9.4% smaller than estimated last month because of increased ethanol production.  In addition, supplies are dwindling as emerging markets increase corn imports and crop yields are weak in Argentina.  If you were short this grain, you’ve gotten corn-cobbed!

Wheat: +10.07% YTD, -0.83 correlation w USD

  • The UN warned this week that China’s northern wheat growing areas are facing an epic drought.  China is the world’s largest wheat producer and wheat noodles are a staple in the Chinese diet.  This news, on top of the Russian export ban and the cyclones ravaging Australia, powered the price of wheat to a 30-month high.

Rough Rice: +15.04% YTD, -0.87 correlation w USD

  • Yesterday Indonesia announced that it will lift its rice stockpiles by a third as it struggles to fight food inflation.  Indonesia's government met to discuss food security and chief economic minister Hatta Rajasa said it would gradually lift rice stockpiles from a current 1.5 million tonnes, underlining its fears over shortages leading to price spikes.  Rice is the number one food staple in Asia – a 15% increase in rough rice prices in six weeks has emerging markets worried.

Cotton: +29.54% YTD, -0.84 correlation w USD

  • Cotton has gone straight up in 2011 as China’s imports have reached the highest level since 2006 because adverse weather has slashed crops and Chinese producers are reportedly hoarding the crop, not selling into the market.  As a result, cotton prices are at a 140-year high and growers intend to take advantage: the American Cotton Shippers Association forecasts that global cotton output will rise 5.7% in the year starting August 1st.

Rubber: +19.21% YTD, -0.79 correlation w USD

  • Parabolic commodity prices can have some bizarre consequences.  On February 4th, 700,000 utra-thin condoms destined for Japan were stolen, and the police suspect an “inside job.”  The Sagami Rubber Industries Company said that these top-selling polyurethane condoms are reportedly worth $1.5 million – that’s 91.9% more than they were worth one year ago!

Kevin Kaiser

Analyst

Commodity Scorecard - commmooodd