The following is an update to Energy, Food and Inflation, which appeared on May 21, 2007.

The inflationary tilt to commodity prices continues and since last May commodity indices have rallied sharply, lead by crude oil and agricultural markets.

“The war of acreage” is on and as competing commodities fight for acreage we may want to turn our attention to cotton and sugar. Farmers naturally want to grow the crops that will pay the highest and with corn, wheat and soybean prices high the fear is other crops will not be getting the necessary acreage.

Cotton showed a 4.4 mln reduction in US acreage planted, and global inventories for cotton continue to shrink. It is estimated that by 2008/2009 the cotton crop could see ending stocks drop to historic low levels. With nearby cotton prices at 64 cents it would not be unreasonable to see a 20% rise in the price of cotton.

Sugar prices will also be supported by less acreage and recent news that Brazil may boost the percentage of the sugar cane crop crushed for ethanol production is bullish.

The weaker dollar is fueling demand for commodities in general and each market has its own fundamental bullish story. Worries about oil supplies for the winter together with geopolitical concerns are keeping a bid in the crude oil market, but higher oil prices are starting to affect the demand equation as China’s demand for oil grew by only .3% in September. Perhaps at $92 the market is ahead of itself and I am shifting out of oil and into other commodities.

The precious metals are benefiting from a weaker dollar, geopolitical concerns and financial market uncertainty. Silver, gold and platinum are soaring and many of the related stocks look as if they could break out to the upside. I have added to silver plays, SSRI and PAAS as well as the ETF GLD.

Going forward the sweet spots may be sugar, cotton and the precious metals.