- Grain & oilseed prices move higher - pointing to a recovery in world fertilizer demand and prices.

TORONTO, Aug. 23 /CNW/ - Scotiabank's Commodity Price Index, which measures price trends in 32 of Canada's major exports, rose by 2.7 per cent month-over-month (m/m) in July and continued to rally in early August, after sharp declines in May and June.

"A significant drop in the U.S. dollar against key currencies lifted dollar-denominated commodity prices last month, as did some return of investor risk appetite for commodities and equities," said Patricia Mohr, Vice-President, Economics and Commodity Market Specialist at Scotiabank.

The increase in Scotiabank's Commodity Price Index was broad based in July, with all sub-components advancing (Metals & Minerals +1.9 per cent m/m, Oil & Gas +2.8 per cent and Forest Products +1.3 per cent). Agriculture led the gain (+7.1 per cent m/m), with strength in grains (wheat, canola and barley) and fish (Pacific salmon and Atlantic lobster).

"Since bottoming in April/May at C$266 per tonne, the Canadian Wheat Board's asking export price for wheat (No.1 grade) has recovered rapidly to C$334 in mid-August (+ 26 per cent) and will likely climb further over the next six months," said Ms. Mohr. Severe drought across the FSU-12, excessive moisture in Western Canada last spring and poor growing conditions in Kazakhstan and the EU-27 will slash world wheat ending stocks to 26.3 per cent of world consumption in 2010-11, down from 29.8 per cent last year. However, stocks should remain above the very low 20.2 per cent of 2007-08, which triggered fear of global food shortages.

The Metal & Mineral Index also rebounded strongly in July, as base metal prices bounced back from declines in May and June, more than offsetting a temporary pull-back in gold and silver prices and slightly lower steel alloy prices (cobalt & molybdenum).

Spot potash prices (FOB Vancouver) were unchanged in July at US$347.50 per tonne, but appear to have edged up in mid-August, with Brazil rumoured to have agreed to a small hike in the granular price to US$390 (delivered) ahead of its peak corn/soybean growing season. Recent developments in world grain markets have already contributed to significant price improvement for phosphate and nitrogen fertilizers.

According to the report, the recent bid for Canada's largest potash producer, also the world's largest overall fertilizer producer, likely reflects the following developments: 1) the expectation that a key inflection point has been reached for fertilizers, pointing to near-term recovery in global demand and stronger prices; 2) a potential merger between Silvinit and Uralkali of Russia (a partner in BPC) under new ownership, with the merged colossus controlling about 28 per cent of world nameplate potash capacity with Belaruskali, suggesting an even more concentrated industry going forward; Canada's leading producer will remain the largest, with significant capacity expansion in the next five years; and 3) expectations for strong growth in emerging market demand for meat and higher-value food products. China's demand for corn to feed animals for meat consumption is likely to be a major growth market for potash over the medium-term.

After losing ground last spring, LME copper prices remain quite resilient, rallying from US$2.95 per pound in June to US$3.05 in July and as high as US$3.38 on August 19 - yielding a 56 per cent profit margin - boosted by supply-side tightness. LME copper stocks have plunged by more than 27 per cent since February.

While China's economy - accounting for 39 per cent of world copper consumption in 2009 - is likely to slow in the third quarter from 10.3 per cent year over year in 2010:Q2 - copper consumption estimates for China are being revised up.

"Huge spending on copper-intensive power infrastructure on the state grid in rural areas will continue through 2012 (12 bn RMB)," added Ms. Mohr. "Beijing has also renewed the home appliance subsidy scheme and is promoting electric cars, which are twice as copper-intensive as conventional vehicles."

"In addition, there is growing recognition that copper supplies are fundamentally tight - given almost no increase in world mine capability over the past five years and declining ore grades at major producing mines," Ms. Mohr noted. "While new mine development will begin to ramp up in 2011, it will not be until 2012 that it has a significant impact. The net result, world supply/demand conditions for copper are in deficit in 2010, with the deficit likely to grow in 2011. The LME copper price forecast has been revised up to US$3.20 for 2010 and US$3.35 for 2011."

The price of Western Canadian premium-grade hard coking coal sold to Japan and other Asian markets increased by US$25 in July to US$225 per tonne (FOB Vancouver). "Spot uranium prices also lifted off the bottom, rising from US$40.75 per pound in mid-June to US$46.00 in late July and US$46.50 in mid-August, as sellers pulled back volumes at prices considered too low," concluded Ms. Mohr.

Gold prices (London PM Fix) lost ground in July, falling to US$1,193 per ounce, but have snapped back to US$1,223 in mid-August. Prices will likely remain exceptionally strong over the balance of 2010, given concern over the potential for additional quantitative easing by the Fed, to spur a slowing economy. Concern over high government debts and deficits also continue to call into question the integrity of key reserve currencies (both the U.S. dollar and the euro).

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