A modicum of good economic news, at least on the commodities front: rice prices are headed for their biggest weekly drop in four years, on the prospect that exports from Japan and Pakistan will ease concerns that a global food shortage is worsening, Bloomberg News reported Friday.

As of mid-day Friday, rice had plunged 14% this week to $19.80 per 100 pounds.

Pakistan, the world's fifth-largest rice exporter, will allow shipment of 1 million metric tons because local needs have been met, Bloomberg News reported Friday. India may also ease its ban on rice exports. Rice is a staple for about 50% of the world's population.

Long-term, secular factors, including expanding middle classes (who consume more calories daily than lower-income groups) in Asia and Latin America, rising oil prices (which increase farming costs), have propelled a global rise in commodity, ingredient, and food prices.

Don't blame agricultural economists if they're feeling somewhat befuddled right now concerning wheat.

After two years of record price increases among grains -- including wheat -- and amid a global commodities price surge, and more than a month after predictions of wheat and bread shortages capable of producing social unrest, the U.S. Government is now predicting a global wheat production recovery for 2008.

U.S. wheat production to rise

The U.S. Department of Agriculture's latest estimate predicts that 2008 world wheat production will increase considerably, including an 8% increase in U.S. production to 656 million tons.

The USDA said good weather and record-high prices that have increased incentives to plant and farm effectively are the primary factors behind wheat's expected large harvest this year, Reuters reported Wednesday.

Wheat traded down 22 cents at $7.73 per bushel in Wednesday afternoon trading. Wheat has declined more than 20% since hitting a record-high $12.82 per bushel on March 12, 2008.

Shares of agricultural equipment maker Deere & Co. (NYSE: DE) have been plunging in early trading more than 6% despite posting a rise for its second-quarter profit, as its earnings per share were a bit shy of analysts' estimates. In addition, the company warned about further higher costs threats.

For the quarter, the world's largest manufacturer of agricultural machinery reported that its profit surged 22% to $763.5 million, lifted by soaring crop prices that increased international demand for agricultural equipment. The company posted earnings of $1.74 a share, slightly missing analysts' predictions for earnings of $1.75 per share in the quarter.

The agricultural equipment maker also announced a respectable 18% jump in revenues to $8.1 billion. Revenue during the period was helped by a 47% increase in overseas sales that benefited from the weak U.S. dollar. Analysts had forecast a lower revenue of $7.6 billion, according to Reuters Estimates.

Analysts believe that Deere & Co. (NYSE: DE) has kept its hand on the plow. The general analyst consensus indicates solid expectations that the company will continue to perform at or above expectations. According to AOL Money and Finance, analysts are giving indications that Deere is a buy. In defiance of today's market pull back, Deere & Co. shares have gained one half percent as of this writing.

Media sources are openly optimistic about Deere & Co., though actual commentary is sorely lacking. Barron"s did go far enough to cite that some strategic execution failures of Deere competitors have played nicely for the company. With the weakened dollar giving solid momentum to Deere's international growth focus, and Deere equipment systems showing robust independent sales, for the time being the company appears to be a relatively safe harbor for longer term investment dollars.

Year to date return on Deere is just above a negative 3%, but the 5 year return on this company is over 300%. The best earnings estimates that I can lay a hand on hover around $1.75 per share.

Gary Sattler is a freelance blogger. He does not knowingly hold investment positions in the companies mentioned in this blog post.

Resource industry specialists Roger Conrad and Yiannis Mostrous are bullish on the agriculture and water sectors; in their model portfolio they already hold 6 stocks in these sectors.

The co-editors of Vital Resource Investor explain, "We see strong underpinnings for continued higher agricultural prices for many years to come." Here's their latest agrculture play: EI du Pont de Nemours (NYSE: DD).

"Recently the United Nations Food Agency warned of civil war in some countries because of global food shortages. With the rapid urbanization of Asian countries, we see a growing global dependence on a shrinking number of food producing nations, particularly with the world adding 78.5 million people each year.

"There will be ups and downs for prices along the way. A throttling back of America's efforts to develop ethanol so extensively or a move to use something besides corn to brew ethanol could take some of the upward pressure off corn prices.

"A real global recession could also cause food prices to back off for a time and it's also possible we'll see some form of US government intervention to curb food prices, particularly as the presidential election develops.

April U.S. import prices rose 1.8%, the U.S. Labor Department announced Tuesday, as petroleum and non-petroleum imports contributed to the rise for the second straight month.

Excluding petroleum/oil, prices increased 1.1%. Economists surveyed by Bloomberg News had expected prices to rise 1.7%. Meanwhile, March 2008 import prices rose a revised 2.9%.

On a year-over-year basis, import prices are up 15.6% -- a level that historically indicates that U.S. consumer price inflation will trend higher due to prices pressure from foreign goods/services.

Economist David H. Wang said the report contained few surprises. "The report continues to display the consequence of record-high oil prices, which are boosting inflation just about across the price spectrum," Wang said.

U.S. Federal Reserve officials, economists, executives, analysts and others closely monitor changes in import and export prices because they provide reads on inflation in the U.S. and internationally. Furthermore, the data frequently has a direct impact on the bond and the currency markets.

Growth is slowing in all regions of the world, and inflation is rising, but the International Monetary Fund's No. 2 person in charge says a repeat of the 1970s stagflation period isn't likely.

IMF First Deputy Managing Director John Lipsky said the "inflation speed-up must be taken seriously as it creates potentially significant challenges to economic stability," Bloomberg News reported Thursday. However, Lipsky added that a return to 1970s-style stagflation isn't likely, but it cannot be totally ruled out.

Oil, commodity-rooted inflation

Further, Lipsky underscored that the current inflation rise is being driven by a fundamental increase in demand for commodities, primarily oil, and to a lesser extent by supply constraints around the world, Thomson Financial reported Thursday via Forbes.com. Hence, the recent price increases are likely to prove finite, Lipsky added, unless these items keep rising more rapidly than other items.

Economist David H. Wang told BloggingStocks Thursday he agreed with Lipsky's categorization of the most-recent rise in inflation but added that government subsidies may prevent a pullback in commodity prices, especially oil. Classic economic theory holds that as the price of a good rises, people will use less of it. However, governments in China, Venezuela and the Middle East, among other nations, subsidize gasoline/fuel, lowering its cost, which discourages conservation, Wang said. The United States does not subsidize motor fuel at the federal level, but individual states do subsidize heating oil/natural gas for low-income citizens.

Peter Way selects his buys by following the trading activity of block traders -- those making large, million dollar bets. Here's the latest from his Block Trader Oil & Gold Monitor.

"The volume stock market liquidity-providers are hedging their necessary position risks in ways that foretell declining oil stock prices. Their records on such outlooks in the past are pretty good, so pay attention.

"The million-dollar market-makers are not always right, and here they tend to be a bit early, but it's obvious they can save you some grief and provide a chance to pick up some meaningful extra profit.

"From our recent review of energy ETFs, we also note that the pros' perception seems to be that energy stocks have been bid up too far. Ok, so what to do? Sell the oil holdings? Then where to put the proceeds?

"One of my favorite was to play the market is to find a hot area and then invest in companies that provide products to support that market," says Dave Dyer.

In The Dave Dyer Newsletter he explains, "Bucyrus International (NASDAQ: BUCY) is a domestic heavy equipment manufacturer that is focused exactly in the areas that will benefit from the global commodities boom.

"The company's products are focused on mining for coal, iron ore, copper, oil sands, and other minerals needed to support the global infrastructure expansion. Mining is hot right now, and all mines need mining equipment. "Rapid industrial expansion in Asia and Eastern Europe requires raw materials. This trend is not likely to stop soon.

"BUCY is a very old company. In 1880, they started as a small foundry in Bucyrus, Ohio. By 1904, they were supplying excavation equipment for one of the largest projects in the world, the Panama Canal. By 1969, they were making earth moving equipment that was almost 22 stories tall. If you need to dig a really big hole, talk to BUCY.

Leo Fasciocco is a technical expert who focuses exclusively on finding breakout candidates. In his Ticker Tape Digest, he looks to agriculture equipment manufacturer Deere & Co. (NYSE: DE).

"Deere, with annual revenues of $24.8 billion, makes agricultural, industrial, forestry, and lawn-care equipment. DE is benefiting from the strong demand for its products in the farm sector. The company is also expanding aggressively in Russia.

"DE has broken out from a 13-week flat base. Its long-term chart shows DE soaring from 20 in 2003 - the start of the prior bull market - to 92. It has been a big winner in the big cap sector. The stock has gained 65% in the past 12 months versus a 5% drop in the S&P 500 index.

"The stock is in a base bracketed between roughly 78 on the downside and 91 on the upside. The breakpoint was set at the key upside resistance of the base. Deere has plowed through that resistance on increasing volume.

"We're bullilsh on meats," says Eric Roseman, who notes, "I'm convinced we're finally at a turning point in 2008 as farmers continue to cull their herds. At some point, I'm expecting beef and pork prices to surge."

Here, the resources expert and editor of The Commodity Trend Alert looks at an exchange-traded note with a memorable trading symbol -- iPath Dow Jones Livestock (NYSE: COW). Here is his review.

"With virtually all commodities soaring over the last several months, the meats have been a disappointment - until about ten days ago. I think we finally broke-out.

"Like the grains, livestock maintain a negative correlation to common stocks. It's a great portfolio diversification tool, especially in 2008 when equities cratered during the first quarter and most commodities rallied. Live cattle and lean hogs have been poor inflation-adjusted investments or speculations since the bull market in raw materials was set afire in 2002.

"Over the last six years, live cattle and lean hogs have gained just under 30% in nominal terms, or up barely 4% adjusted for inflation. That pales compared to the huge gains logged by the base metals, precious metals, the grains and other commodities.

Readers of this space know that the preferred tack is to look for well-capitalized companies with competitive advantages in sectors with secular, long-term growth trends. One select sector has been oil/oil services, and another right near the top has been fertilizer producers, primarily Potash, Mosaic, and Agrium, first reviewed in December 2007-January 2008.

To be sure, the sector has been bid-up, as a wider community discovers the value of fertilizer and companion products amid the likely substantial increase in global food demand in the decade ahead.

Too late to get in on a fertilizer play? Hardly. P/Es are higher, so entry point is key, but with the above in mind, here's a revised review of the fertilizer producers, with the updated Sell/Stop Loss levels. They're ranked by risk, with the top stock, POT, being the lowest risk.

"Some 20,000 or more million-dollar block trades are made each day," says Peter Way in Block Traders ETF Monitor, which assesses the activity of these trades. Here's some current top "big block" bets.

"Since it's these big dollar pressures that move markets, we want to know what they are likely to do next. Our analysis determines what the pros' expectations are for the coming prices of stocks, from the way
they protect investments they have or are making.

"Based on our proprietary analysis of this big block activity, we determine the prospects for each ETF sector to determine where prices will be in the next 3 months. We seek the best balance of upside risk and downside exposures.

"We don't want to buy anything that doesn't offer a net payoff of better than 5% over three months, or an annual rate of +22%. International and global ETFs. and emerging markets still hold appeal, with MSCI Brazil iShares (NYSE: EWZ), the best bet.

"Where's the beef? Must be in MOO, the Market Vectors International Agricultural ETF (ASE: MOO). Prospects for it are the best combined odds & payoffs in the group.

"The ETFs that have been providing the most reliable and productive gains of late have been in commodities. Without any leverage, there are currently a number that appear attractive, given the volume market-makers' appraisals. The PowerShares DB Agricultural Index ETF (ASE: DBA) outranks just about all of the 2,500 issues we cover. PowerShares DB Commodities Index ETF (ASE: DBC) also offers strong buy credentials."

Each day, Steven Halpern's TheStockAdvisors.com offers the latest market commentary and favorite investment ideas from the nation's leading financial newsletter advisors.

TheStreet.com's Jim Cramer says the bull story here has more causes than just a weak greenback.

Better seeds and more fertilizer. That's it. Those are the technology weapons in the war against food shortages caused in the short term by a worldwide obsession with biofuels (we are the worst offender, of course) and in the long term by the increased affluence in China and India, which leads to more nutritious, protein-filled diets.

Both forces, when combined with worldwide droughts and failed harvests, not augmented by the U.S. -- we are late to start with our corn season -- are driving prices up to ridiculous levels. I have no doubt that if tomorrow the president of the United States said he was suspending the biofuel mandates for ethanol that we would see a collapse in food pricing. But I also have no doubt that this inept administration could never figure that out.

So, the solution comes to all of the stocks that were crushed yesterday: Monsanto (NYSE: MON) (Cramer's Take), Potash (NYSE: POT) (Cramer's Take), Mosaic (NYSE: MOS) (Cramer's Take) and Agrium (NYSE: AGU) (Cramer's Take). Without better seeds that produce higher yields, without more fertilizer that increases yields, we are going to be facing a long-term continuation of these price increases and the attendant inflation and food riots. Inflation, by the way, that has nothing to do with the Fed, unless the Fed is also a big granary hoarding wheat and corn.

Inflation, public enemy No. 1 in the 1970s in the United States, appears to be regaining its former title in the first decade of the 21st century.

But is it here to stay? That depends on the data you're looking at, most economists agree. U.S. inflation is trending higher, but whether it is more structural or cyclical (simply a product of current demand conditions), is the focus of debate in economics circles.

Structural view

Economist Peter Dawson says structural changes are occurring that will keep inflation well above the U.S. Federal Reserve's 2-2.5% comfort zone for years. Those changes include strong demand for commodities in both emerging and developed economies, the U.S. budget deficit and trade deficit, and the weak U.S. dollar.

"What we're seeing today, in my view, is a new economic age. It's not a cliché. We have more than half the world developing at the same time and it has and will continue to place pressure on commodity prices, oil being the first, but now grains / food stuffs and minerals following close behind," Dawson said. "This is creating a whole new cost layer not only in the U.S., but around the world."

A classic market theorist, Dawson does expect higher prices to do what they're supposed to do, eventually: reduce demand. However, with regard to grains, it's difficult to predict the level at which demand will ebb, due to government subsidies. Meanwhile, oil, he said, "is reaching its zenith, probably at $125 per barrel." Further, Dawson believes a sustained $100 oil price will "propel the development of cheaper, alternative energy sources in the next decade" that will enable sufficient global economic growth. But until commodity demand cools and new energy forms arise, you can expect above-average inflation, both in the U.S. and globally.