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Grain,oil reignite the 1990s commodity boom

LONDON: Soaring prices for grain and crude oil are reigniting a mid-1990s boom in world commodities.

The key industrial metals, however, have yet to join the latest rally. Nor has gold, although analysts disagree on whether bullion is any longer a reliable weathervane of commodity-led inflation.

Concern in inflation-shy equity and bond markets, and among cash-pinched Third World importers, focussed on oil and on dry weather in the farmlands of the United States.

World food stocks are already at 20-year lows after drought elsewhere around the globe in 1994 and Chicago maize futures have now rallied to all-time highs.

Wheat is also at values around $5.50 per bushel, not seen since the 1970s when catastrophic harvests on its collective farms led the Soviet Union to raid Western grain markets.

Leading commodity brokerage GNI commented on Thursday that traders seem now to be betting on "a dust bowl in the US" --whereas, it said, actual moisture levels are far from bad.

But it adds that "with grain stocks at critical levels, the disaster scenario of a crop failure in the largest producer is certainly much closer to reality than it was a few months ago".

Grain prices have been high since 1994.

Low stocks also helped trigger a more recent rally in energy prices. Oil stocks in the U.S. are at 20-year lows in a year when summer holiday gasoline demand is expected to set records.

Benchmark Brent Blend crude oil for prompt delivery was quoted on Thursday near $23 per barrel (42 US gallons), a level not seen since October 1991.

The rallies on grains and oil have sent the widely-watched Knight Ridder-Commodity Research Bureau index of commodity futures to its highest in eight years.

But the 259.10 that it hit on Wednesday is well down on the all-time peak of 337.60 in the 1980 OPEC oil price "shock".

And gold prices, the traditional barometer of commodity inflation, and the industrial metals so far remain subdued.

Gold languished on Thursday below a psychological barrier at $400 an ounce whilst the benchmark copper price on the London Metal Exchange has struggled lately to get above $2,500 a tonne compared with $3,000 in January 1995.

"It's not the 1970s where we had genuine inflation shocks," says Andy Smith, metals analyst at Union Bank of Switzerland.

"What we have now is everybody monitoring this in real time, so how can we have an inflation surprise?"

But Smith belongs in a camp that questions gold's traditional role as a haven for investors who are afraid of inflation, since inflation spells higher interest rates and those may make other assets relatively more attractive.

"It sounds crazy, inflation kills gold. But that's not as bananas as it sounds," Smith said.

GNI meanwhile suggests that in the present mood there may be "basket buying" of commodities that would lift the entire sector.

"Grains are going up so let's buy coffee seemed to be the order of the day", it said.

Amid signs of renewed, if selective, interest among speculative funds, several U.S. analysts also said that strong supply/demand fundamentals had piqued investor interest.

"I'm getting calls from non-commodities people that I only hear from when something exciting is happened," said William O"Neill with Merrill Lynch in New York on Wednesday night.

He pointed out that even quite modest movements of speculative money from bigger financial markets to the commodities can have a dramatic impact on raw material prices.

London future markets opened firm on Thursday in coffee, cocoa and sugar.

Benchmark Robusta grade coffee futures extended recent gains to around $1,925 per tonne. That price, however, remains way down from $4,000 hit in 1994 after frost and then drought in Brazil.-Reuter