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The confluence of increased geopolitical risk, easy monetary policy, slowing growth in emerging markets, and abnormal supply forecasts has whipped commodity prices about wildly in 2011.  Here is a quick recap of what’s driving the recent price moves (other than US dollar correlation) of ten commodities that we keep a close eye on.  For reference, the US dollar index (DXY) is down -2.80% YTD.

Cheddar Cheese: +47.67% YTD, -0.71 correlation w USD

  • Several factors have rocketed the price of cheese higher in short order.  First, higher feed costs (corn, oats) have made their way to the end product.  Second, attractive slaughter cow prices appear to be encouraging much heavier culling of cows from the herd.  And third, Australia and New Zealand, which account for 40% of the world dairy trade, have scaled back milk production forecasts for 2011 due to adverse weather negatively impacting pastures.

Cotton: +26.52% YTD, -0.57 correlation w USD

  • Cotton prices may have stabilized after hitting a 140 year high on February 17th, falling 15% since.  Cotton is still up 129% over the last year, which is hurting emerging markets.  Yesterday the Apparel Exports Promotions Council of India announced soaring cotton prices are likely to crimp India's apparel exports by at least 15% in volume terms this year.

Cocoa: +20.26% YTD, -0.76 correlation w USD

  • Alassan Ouattara, President of the Ivory Coast, has extended the country’s ban on cocoa exports until March 15, 2011.  As a result, cocoa prices are at a 32-year high.  The Ivory Coast produces 37% of the world’s cocoa.

Brent Crude Oil: +16.02% YTD, -0.55 correlation w USD

  • It appears that (at least for now) Brent crude is more indicative of global supply and demand for oil than is WTI, as the glut of supply in Cushing, OK has caused WTI to lag other light, sweet grades.  Brent crude is now at its highest level since September 2008 as violence in Libya and the fear of contagion has the market worried about future supply.  Currently, the Middle East produces 57% of the world’s oil.

Corn: +7.47% YTD, -0.53 correlation w USD

  • The US Department of Agriculture data shows that global corn inventories are at a 37-year low as producers are unable to grow enough grain to keep pace with consumption.  The global grain harvest for the past season was 2.18 billion metric tons, down 2.5% year-over-year.  The USDA estimates that the world will consume 2.24 billion metric tons of corn this year.

Gold: -0.61% YTD, +0.26 correlation w USD

  • Gold underperforms when real interest rates are positive and rising – that is why gold had its worst January in twenty years.  However, gold performs well when geopolitical risks escalate, which is why this safe haven is up 3% in the last five days.

Copper: -3.62% YTD, -0.27 correlation w USD

  • Weakness in copper is not bullish for global growth.  Copper stockpiles tallied by the London Metal Exchange are at the highest level since August 2010, while inventories monitored by the Shanghai Futures Exchange jumped to a nine-month high of 161,062 tons last week.

Wheat: -4.91% YTD, -0.65 correlation w USD

  • MENA buys 32% of global grain shipments and Egypt is the world’s largest wheat importer.  Violence and riots in the area will curb demand for soft commodities, which is why corn, wheat, and soy were limit-down on Tuesday.  On the supply side, India announced today that it may permit wheat exports as the country may harvest a record crop this season.

Natural Gas: -13.05% YTD, +0.32 correlation w USD

  • As the peak demand season for natural gas comes to a close, natural gas is stuck under $4/Mcf.  An extreme winter has US gas inventories 6.3% below the 5-year average, yet traders are confident that supply will come roaring back once the drawdown season ends.  Supporting this, BHP Billiton (BHP) plans to triple output from current levels in the Fayetteville shale in Arkansas, the assets that they acquired this week from Chesapeake Energy (CHK).

Coal: -15.38% YTD, +0.36 correlation w USD

  • China, the US, and India are the top three consumers of coal.  Growth is already slowing in India and China, and we don’t think that the US is far behind.  Coal down 15% YTD is not bullish leading indicator for economic strength in the US.

Kevin Kaiser

Analyst