June 30, 2008


Sustained rally on grain markets expected


First-half 2008 has witnessed a hefty commodity rally, led by gains of 50 percent in crude oil futures, and Friday's markets looks to continue that trend, analysts said.


August crude oil on the New York Mercantile Exchange hit a new record of US$142.26 a barrel Friday morning, as investors continue to plow money into commodities with the weak US dollar a catalyst for the cause.


"The commodity rally is in full effect, and I think this is going to be the trend for the next five to 10 years," said Zachary Oxman, senior trader with Wisdom Financial.


"It's led by a weak dollar, strong crude and it's led by obviously what's going on in the Midwest in the grains market," he said.


The major commodity indexes are reflecting investors' shift to the futures markets this year. The Continuous Commodity Index as of Thursday's close has gained 25 percent for the first half of 2008; the Dow Jones-AIG Commodity Index has gained 26.4 percent; and the Reuters/Jefferies Commodity Research Bureau Index has shot up 29 percent on the year.


At 10:10 a.m. EDT Friday, the Continuous Commodity Index is up 1.47 at 597.29, after reaching a record high 597.84; the Dow Jones-AIG is up 12.64 at 235.010, after topping out a record 235.656; and the Reuters/Jefferies CRB is up 1.62 at 464.89, earlier setting a record at 465.19.


The gains have been led in large part by the 50.3 percent appreciation in August crude oil, up US$46.72 a barrel so far in 2008, based on Thursday's close.


The Chicago grain markets were also expected to continue their frenzied pace, as supplies dwindle and demand shows no sign of letting up, analysts said.


Don Roose, president of US Commodities, said instead of a bigger crop to alleviate grain price increases, all signs are pointing to a drop due to the Midwest floods. 


The grain markets have yet to prove that it can ration on a day-by-day basis in order to curb the bullish effect of record prices and stout demand, particularly from the feed and ethanol sectors.


Ahead of the pit open Friday, corn futures are called 6-8 cents a bushel higher, wheat is seen up 10-12 cents and soybeans are called 10-15 cents higher.


In the current economic environment in which the Federal Reserve is now fearful of increasing inflationary pressures, the play for commodities is only expected to strengthen.


Morgan Stanley analyst Michael Jansen says commodity prices and inflation risks have essentially morphed into the same thing in recent weeks, suggesting that the inflation outlook is largely derived by the price action in an energy-dominated commodity marketplace.


"The more that commodity prices increase the more the market worries about inflation and the more that investors and traders look to hedge their inflation risk through commodity prices," Jansen said in a research note.


Meanwhile, Oxman sees the commodity buying trend remaining intact for years to come.


"It's a strong commodities trend and you don't want to be in the way of it," said Oxman.

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