Beginning in March 07 through July 08 we saw one of the greatest commodity bull markets in history with prices rising to record highs. The prices of oil, grains and precious metals went wild. This in turn drove up the price of food and gas to over $4.00 per gallon. The culprit at the root of this dilemma was our weak dollar. Investors felt that it was more profitable to hold tangible commodities than declining dollar assets.

Now, in December we are faced with another very similar dilemma.The March dollar contract has dropped from 89.25 to 82.68 over the past few weeks. Correspondingly, forward contracts for oil have jumped from 40.81 to 54.09. Wheat has followed the trend rising from $4.71 per bushel to $5.24, soybeans from $7.79 per bushel to $8.75, corn from $2.93 per bushel to $3.59 and gold from $681.00 per ounce to $827(these latest prices were taken at the start of trading 12/15/08).

Whether of not this trend will continue is up for discussion. Could it be that we could have deflation in the general economy and commodity inflation at the same time? I don't know. This could be just a bear market rally or it could be the resumption of the upward trend that started in March 07. The best way to get a sense of what is happening is to follow the prices. In the end, it is the price that determines the trend.

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.

The Mosaic Company (NYSE: MOS) volatility elevated as MOS at record high into EPS.

MOS, a producer and marketer of concentrated phosphate and potash crop nutrients, was spun out of Cargill in 2004. MOS is recently up 10 cents to $53.35. MOS is expected to report earnings per share (EPS) on October 9th. MOS October option implied volatility of 52 was above its 26-week average of 40 according to Track Data, suggesting larger price risks.

Potash Corp./Saskatchewan (USA) (NYSE: POT) volatility elevated as POT at record high on grain price rally:

POT, the world's largest fertilizer enterprise, by capacity, was recently up $1.43 to $105.58. SBSH says "Potash shortages possible in 2008." SBSH goes on to say "we think high prices for wheat and corn will send a signal to farmers in developing countries like China to increase Potash application rates." POT over all option implied volatility of 46 is above its 26-week average of 39 according to Track Data, suggesting larger price risks.

Option update provided by Stock Specialist Paul Foster of theflyonthewall.com.

Gold has shined lately, aided by near-record weakness in the U.S. dollar, strength in commodities like oil and grains, and safe haven buying amid turmoil in credit markets.

Since the low point in mid-August, the yellow metal -- which has an equivalent exchange-traded fund, the streetTRACKS Gold Trust (NYSE: GLD) -- has gained nearly 10% and is fast approaching the highs seen in May 2006.

Interestingly, strength in gold has not quite spilled over into silver -- which has an equivalent exchange-traded fund, the iShares Silver Trust (AMEX: SLV). Silver is up a little more than 9% over the one-month span and remains below its 2006 and February 2007 peaks.