The Commodity Bull Is Still Roaring

As the thermometer shoots higher to usher in another long, hot summer, it seems commodity prices are also heating up again.
According to Bloomberg, corn and soybeans are on the rise again, thanks to forecasts calling for a warm dry summer, with not enough rain. Cotton prices are even getting into the act; soaring to fresh three-year highs, thanks to surging demand from...you guessed it, China.
Of course, cotton is still a laggard in this commodity bull market, having appreciated less than 3% in the past year, compared with an 80% jump in corn, and a 40% surge in soybean prices.
Soft Commodities: The Hot Ticket for the Next Phase of This Bull Market
In fact, many of the so-called "soft commodities," that have largely been behind in the commodity bull market, are now beginning to perk up.
To me, this signals the next phase of the commodity rally is getting underway in earnest. Investors' focus has simply shifted (at least for the time being) away from gold and energy, and toward the most undervalued sector of the commodity market.
This phenomenon is quite similar to what happens in the stock market - it's called "sector rotation."
In stocks, investors will push up a certain group for a while, like the tech sector. But after a correction sets in and profits are taken, the professional investors start to look elsewhere.
So while gold is taking a bit of a breather right now, up just 2% so far in 2007, other "sectors" of the commodity market are picking up the slack, like the agricultural commodities.
Why the Food-Stuffs Are Shooting Higher
In fact, the agricultural commodities in particular look poised for big gains for several reasons.
Global economic expansion is the most obvious reason for continued strong demand for natural resources, especially agricultural commodities. Land available for farming has dwindled, as climate change leads to acute water shortages in many regions of the world affect crop yields. For instance, Australia is in the midst of a severe drought.
At the same time, standards of living in the developing world are boosting the demand for food big time.
Food expenditure per person in Chinese cities more than doubled between 1995 and 2004, according to the latest data from the U.S. Department of Agriculture. And with China's economy expanding at a rate of 11% or more, demand for all kinds of soft commodities should remain robust.
The End is Nowhere Near
I've heard some people talk about the end of big gains in commodities, but that talk sounds off base to me. In fact, studies have shown that commodity bull markets tend to be long-term affairs.
Rather than three to five years of boom, followed by bust, commodity bull markets have lasted an average of about 18 years. So the current bull run in commodity prices looks like it's still early. This commodity bull market may be ready to shift into high-gear again, led this time around by agriculture.