Commodities Daily: Ag Prices Rise, Severely Lag Rare Earths (WY, MCP, REE, AVL, VALE, RIO, BHP)

It’s 4:00 pm and time for our daily look at commodity prices and news. Today’s biggest upside move in ag products came in cotton, up about 3.5%, while wool was up about 2.5%. The biggest downside move came in lumber, down more than -2.5%.

Publicly traded rare earths miners Molycorp, Inc. (NYSE: MCP), Rare Element Resources Ltd. (AMEX: REE), and Avalon Rare Metals, Inc. (AMEX: AVL) are trending back up, but because Japan’s industries take such a large share of China’s rare earth metals, a longer-than-expected delay in restarting Japanese industrial production could bring these stocks back down. None of these companies have yet produced a single ounce of rare earth metals and none will until at least the end of this year.

Less rare and less costly, iron ore remains in strong demand even though the consequences of the Japan disasters have yet to be determined. Vale S.A. (NYSE: VALE) and Rio Tinto plc (NYSE: RIO) have both stayed on a quarterly contract pricing system while BHP Billiton plc (NYSE: BHP) has varied contract pricing to include some based on monthly changes, some on quarterly changes, and some on spot prices. Rio Tinto is still trying to recover from the flooding in its Australian mines earlier this year.

Exports of rare earth metals from China are falling in volume and rising in price. A metric ton of the metals topped $100,000 for the first time in February. Because the Chinese remain the only source of these metals, the defense, electronics, and electric car industries have no choice but to pay the price.

Cotton prices continue to rise as demand from India, a major cotton producer, outstrips the country’s ability to produce. China, too, is expected to produce less cotton this year. The rising price for cotton hits clothing makers particularly hard. Higher clothing prices also took a share of the blame for the 4.4% inflation rate in the UK in February.

Wool prices have also been rising, partly as a result of near parity between the Australian and US dollars, but also on greater demand for wool clothing. Polyester clothing, made from petroleum products, follow the price of crude oil, and wool and cotton clothing are more in demand and supply is tight.

The lumber industry is still hit hard by the lack of new home construction in the US. Demand for lumber from China picked up some of the slack late last year and earlier this year, but the pick-up has not been sustained. Weyerhaeuser Co. (NYSE: WY) said that it would be cutting down fewer trees to keep prices from falling.

The disaster in Japan should begin to have an impact on lumber sales, once the country gets into rebuilding mode. Right now, the Japanese are still struggling to get their nuclear reactors under control and to finish locating the dead and missing. But repairing the utter devastation of the area hit by the tsunami should give lumber suppliers a boost within a few months.

One commodity to watch is corn and the continuing fight over the grain’s use as food or fuel. The amount of corn going to make ethanol is now equal to about 40% of last year’s total corn crop. As long as the US government continues to pay a credit of $0.45/gallon of corn-ethanol in expanding quantities, corn prices will continue to rise. The good news is that the subsidy is set to end (again) at the end of this year.

Paul Ausick