By Mike Caggeso Associate Editor
When Dean Foods Co. (DF), the biggest U.S. dairy producer, reported this week that its fourth-quarter profits were slashed by 55%, the culprit was a 47% jump in the price of milk, a key dairy commodity.
Conversely, soaring demand for natural-resource commodities including coal has generated tremendous business opportunities for DryShips Inc. (DRYS), a company that owns and operates dry bulk carriers around the world.
Commodity prices of all types have been on the march over the past several years. From a business standpoint, those price increases clearly cut both ways, helping some companies and hurting others.
For investors, the challenge is figuring out which commodities are continuing their surge and which ones are enduring a price reversal. For every commodity on earth - from milk to gold - there are specific catalysts that influence supply and demand. And that's the best way to explain why some commodities have fallen from highs in 2007, while some continue to soar into 2008.
Sometimes it's tough to tell just who's winning and who's losing: While gold mining companies are rejoicing over gold's leap past $900 an ounce, high prices are to blame for overall demand dipping 17% in the fourth quarter.
When it comes to so-called "soft commodities," the powerful pricing trends that arose last year have carried through into this year, with a number of soft commodities posting record highs:
"We're in something like a gold boom, a wool boom," Brett Stevenson, a forecaster for AgRisk, told Australia's ABC News. "We're in extraordinary territory."
The emergence of China and India - and the increasing use of biofuels - has driven up demand across the board for commodities. At the same time, droughts, floods, and the conversion of farmland into residential property because of soaring land values, have all combined to crimp the supply of the commodities from farmers.
Historically, supply and demand has fluctuated wildly at times. But there's been one constant: People always had to eat.
If nothing else, that one fact will help make soft commodities a relatively safe long-term bet.
Metals also posted record highs last year. While some have skidded from those highs in the New Year, others have continued their ascent:
The supply-demand equation for these commodities isn't as simple as that of soft commodities.
Take gold, for example. It's seeing a rush of new investors because of the falling dollar and plans to cut U.S. interest rates even further. To them, gold is the epitome of investment security.
However, soaring prices mean that jewelry costs more. And you know the price is getting too high when fourth-quarter gold sales fall 64% in India - a country that accounts for about one-third of the world's retail demand, The Wall Street Journal reports. But even in that country, gold isn't worth overpaying for.
Coal is different. Nobody personally wants to buy it, but all countries need it. And the chief catalyst behind the fossil fuel's record run is demand from such emerging nations as China and India that have undergone a rapid economic and industrial expansion.
"All over the world, everyone is looking for coal because all economies are developing ... so they need energy ... that's why we are in this situation," Exxaro Resources Ltd. (OTC: EXXAY) Chief Executive Officer Sipho Nkosi told the Daily Dispatch.
Famed commodities guru Jim Rogers - who predicted the global commodities boom we're experiencing more than a decade ago - recently conveyed his views to Yahoo! Finance.
The bottom line: Rogers is backing away from precious metals right now, mainly because he fears the U.S. economy is headed for a recession.
"If the largest economy in the world goes into a recession, that's going to affect people. That's going to affect the demand of everything. So I'm not sure I would buy metals right now."
However, he's "buying agriculture [commodities] as we speak."
"As other parts of the world grow, they like to eat more," Rogers said. "There are 3 billion people in Asia. That's billion with a ‘B.' In America, we have 300 million. There are 10 times as many people over there, so I see good things happening in agriculture." [To see how you can obtain a free copy of Jim Rogers' just-released bestseller, "A Bull in China: Investing Profitably in the World's Greatest Market," please click here.]
But how does one invest in agriculture? With gold, you can buy coins, or bullion. But the typical individual investor can't buy a bushel of corn or soybeans, and then find a nice dry and safe place to store them and wait as they appreciate.
Deutsche Bank's PowerShares Agriculture Fund (DBA) is intended to reflect the performance of four commodities in the agriculture sector - soybeans (31.13%), wheat (28.87%), corn (23.43%) and sugar (16.58%). These include some of the key commodity plays that Rogers advocates.
Another is Van Eck's recently launched Market Vectors Agribusiness ETF (MOO). Like the PowerShares Fund, this reflects the agriculture industry, albeit in a different way. Instead, the ETF's holdings reflect returns seen from agriculture chemicals (34%), agriproduct operations (33.5%), agriculture equipment (24.3%), livestock operations (5.6%) and ethanol/biodiesel (2.3%).
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